Indian’s passion for gold is known to all. Gold is an asset with a social and emotional value attached to it, especially in India. It is the most desired asset that one wishes to hold. And we traditionally pass the passion down through the generations. Gold has religious importance as a token of Goddess Lakshmi and represents wealth. India is the second-largest consumer of gold after China because of this. But let’s see it with a different perspective. Let’s talk about saving in Sovereign gold bonds & tax implications on them.
Defining Sovereign Gold Bonds:
SOVEREIGN GOLD BONDSs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
They are distributed in 1 gramme and multiples of that weight in gold.
For gold bonds, the maturity term is eight years (with an exit option at the end of the fifth year to be exercised on the interest payment date). They can be traded on the stock market. Investments in SGB are subject to lock-in for a period of five years.
Are sovereign gold bonds a wise financial decision?
GOLD BONDS is a good option for investors to consider as it is very transparent and cost-effective compared to physical gold.
Today, there are better ways to invest in gold besides purchasing actual gold (such as jewellery, bars, and coins). Sovereign Gold Bonds (SGBs) are one such possibility.
Who all can invest in SGBs?
Investments in SGBs are open to anyone who qualifies as an Indian resident under the Foreign Exchange Management Act of 1999. This comprises private parties, HUFs, trusts, academic institutions, and nonprofit organizations. Every SGB application will need to follow the KYC guidelines.
Individuals are authorized to hold joint ownership. A minor may invest via a guardian as well.
How can SGB investments be made?
These bonds are sold only through the following entities:
Nationalized banks
Scheduled private and foreign banks
Designated post offices
Stock Holding Corporation of India Ltd. (SHCIL)
Authorized stock exchanges
Brief of pros & cons of SGBs:
Pros:
On the initial sum in SGBs, interest is earned at a fixed rate of 2.50% per year for the holding period. Your bank account will receive semi-annual interest credits, and the final interest payment is due at maturity together with the principle.
TDS is not applicable for payment of interest on SGBs.
Holding gold in a physical form has always posed a threat of being stolen to the investor whereas SGBs is one of the safest form of investment.
Cons:
There is a lock in period of 8 years in which for the first five years investor can’t redeem the bond in any condition whatsoever.
As known gold prices are always turbulent, Depending on the volatility of International market, it result in capital loss in case where redemption price is lessor than the purchase price.
Understanding the effects of taxes on SGBs
With an option to redeem early after the fifth year on the date interest is due, the SGB has an eight-year tenor.
Interest on SGBs is taxed in accordance with the rules of the Income Tax Act of 1961. The capital gains from the redemption of SGB by a person are not taxed. Long-term capital gains from the transfer of the SGB will be subject to indexation advantages.
There are three levels at which the tax consequences of sovereign gold bonds must be comprehended.
The 2.5 percent interest that you earn on your gold bond investments is fully taxable in your possession at your highest tax rate.
If you are in the 30% tax bracket, you will ultimately pay the most tax on your interest receivable. There is no TDS applied to interest paid out, thus you must report this income and pay advance tax in accordance when completing your returns.
Tax on capital gains
After eight years, sovereign gold bonds are redeemed. Any capital gains will be completely tax-free at the time of redemption. The government has offered this particular tax benefit in order to boost the attraction of the tax bonds and persuade more investors to move from physical gold to non-physical gold.
If you leave the gold bonds before then, there are other repercussions. You can exit your bonds earlier in two different ways.
First, you can redeem your gold bonds using the window for early redemption that opens at the conclusion of five years.
Second, you should promote your gold bonds for sale. After six months have passed from the date of issuance, all gold bonds will list on stock markets with a distinct ISIN. The capital gains in both of these securities will be taxed.
Conclusion:
SGBs are an investment that pays off. It generates income in addition to interest and potential capital growth. In other words, SGBs give you the option of intelligently hedging your investment portfolio.
Investing in SGBs is a better option than purchasing actual gold because it reduces the risks and expenses of doing so. The risk of loss, theft, etc. is eliminated because SGBs are kept in the RBI's books or on a demat form. When you sell actual gold jewellery, you also avoid problems like fabricating charges and the purity of the metal, which is sometimes risky.