Sovereign Gold Bonds: Understanding income tax exemption on early redemption of SGBs

I had invested in Sovereign Gold Bond (SGB). I opted for early redemption after the completion of five years. Are the profits made on such early redemption also tax-exempt, like redemption on maturity? Am I required to declare long-term capital gains on these bonds in my ITR2?

A Sovereign Gold Bond (SGB) is the best way to invest in gold because, in addition to price appreciation, it also offers an annual 2.50% interest on the issue price of the bonds. Though the tenure of SGB is eight years, the RBI allows you to opt for early redemption of the bonds any time after the completion of five years but only on the next due date for payment of interest.

Capital gains arise on the sale or transfer of any capital asset, but the redemption of SGB by an individual with RBI is not treated as a transfer under Section 47(vii) of the Income Tax Act.

As the redemption of SGB by an individual is not treated as a transfer under the income tax laws, there is no question of any capital gains accruing to the individual. The exemption from capital gains is available not only for bonds redeemed on maturity but also for bonds tendered for early redemption after five years. It is available whether the bonds were originally subscribed to or were subsequently bought from the open market.

SGB: Capital Gains vs. Redemption Profits

Please note that if the SGB are sold on the stock exchange platform or transferred privately, the profits will be treated and taxed as capital gains. The same would be taxed at your slab rate if sold within one year and taxed at 12.50% if sold after one year.

The profits made on redemption of SGB are not treated as income at all as they do not result from a transfer, and as such, there is no need to report such a transaction in your ITR. If you wish to be extra careful, you can indicate the amount of profits made on redemption under the EI (Exempt Income) schedule of the ITR, though strictly speaking, it is not to be treated as income in the first place.

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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on social media platform X (formerly Twitter)

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