Sovereign Gold Bonds (SGBs) are an excellent way to invest in gold, offering both price appreciation and a fixed annual interest of 2.50% on the issue price. While SGBs have an 8-year tenure, investors have the option for early redemption after five years, on specific interest payment dates set by the RBI. One common question from SGB investors is whether the profits from early redemption are tax-exempt and if they need to be declared in the Income Tax Return (ITR2).
Yes, the profits from early redemption of SGBs are exempt from income tax, just like the profits made on redemption at maturity. Under Section 47(vii) of the Income Tax Act, the redemption of SGBs is not treated as a “transfer” of a capital asset, meaning no capital gains tax is applicable. This exemption applies whether the bonds were originally subscribed to or were purchased from the secondary market.
Since the profits from redeeming SGBs are not considered taxable income, they do not need to be declared in your ITR2. However, for those who prefer to be cautious, the profits can be reported under the “Exempt Income” (EI) schedule of the ITR. This is purely optional, as the gains are not taxable or treated as income in the first place.
It’s important to note that the tax treatment changes if SGBs are sold or transferred before redemption. If you sell the bonds on the stock exchange or transfer them privately, the profits are subject to capital gains tax. In such cases:
The early redemption of Sovereign Gold Bonds offers tax-exempt gains, just like redemption on maturity. These profits are not considered income, so there’s no obligation to declare them in your ITR2, although you can report them under the “Exempt Income” section if you choose to do so for completeness. However, if you sell the bonds on the market, capital gains tax will apply based on the holding period.
Investing in SGBs provides both a secure return through interest payments and the potential for price appreciation without the burden of capital gains tax on early redemption, making it a favored option for long-term gold investors.
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