Sovereign Gold Bonds

Sovereign Gold Bonds are issued by the Reserve Bank of India on behalf of the Government of India under the RBI’s gilt‑issuance programme. Each bond represents a specific quantity of gold – typically 1 gram – and is denominated in Indian rupees.

The bonds have a tenure of eight years, with an option to exit after the fifth year. Interest at a fixed rate (currently around 2.5% per annum) is paid semi‑annually and is taxable as per the investor’s income‑tax slab.

Unlike physical gold, SGBs do not attract storage costs, and they earn a modest interest component, making them attractive for long‑term wealth creation. For the NISM exam, remember that SGBs are classified under “Other Products” in the taxation chapter.

• Issued in tranches, usually twice a year.
• Minimum subscription: ₹1,000; maximum per fiscal year: ₹4 lakh for individuals.

The semi‑annual coupon paid on SGBs is treated as "Income from Other Sources" under the Income‑Tax Act. It is added to the investor’s total taxable income and taxed at the applicable slab rate for that financial year.

Importantly, there is no Tax Deducted at Source (TDS) on the interest. The bondholder must compute the tax liability while filing the return and pay any balance tax as per normal procedures.

For exam purposes, the key point is that interest is fully taxable, unlike the capital gains on redemption, which may be exempt. Questions often ask you to calculate tax payable on a given interest amount.

If an investor holds the SGB until the scheduled redemption date (the 8‑year maturity), the capital gain arising from the difference between the redemption price and the issue price is exempt from tax under Section 10(38) of the Income‑Tax Act.

The exemption applies only when the bond is redeemed by the original holder or by a legal heir after the holder’s demise. Transfer of the bond before maturity does not attract this exemption.

Exam questions frequently present a scenario where the bond is redeemed after 8 years and ask whether any capital‑gain tax is payable. The correct answer is “No, the capital gain is tax‑exempt.”

SGBs are listed on stock exchanges, allowing investors to sell them before maturity. In such cases, the capital gain is taxable and the rate depends on the holding period.

Holding period up to 36 months = Short‑Term Capital Gains (STCG) taxed at the investor’s slab rate. Holding period beyond 36 months = Long‑Term Capital Gains (LTCG) taxed at 10% without the benefit of indexation (as per the Finance Act 2018).

For NISM, remember the 3‑year threshold and the distinct LTCG rate of 10% (plus applicable surcharge and cess). Questions may give purchase and sale prices and ask you to compute tax liability.

Advisers must ensure that the client’s KYC is complete before recommending SGBs, as mandated by SEBI (Investment Advisers) Regulations, 2013. The client’s risk profile should be matched with the low‑to‑moderate risk nature of SGBs.

All transactions in SGBs must be reported in the client’s portfolio statement, and the adviser should disclose the tax implications of interest, redemption, and secondary‑market sales. Failure to disclose may lead to regulatory action under SEBI’s code of conduct.

Advisers should also keep a record of the client’s holding period to correctly advise on the applicable capital‑gain tax rate at the time of sale. The RBI publishes the interest rate each tranche; staying updated avoids misinformation.