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June 8, 2020

Should you invest in Sovereign Gold Bonds 2020-21 Series III Starting 8 June? What is Tax implications?

by Mahesh Mara in Compliance Law, Income Tax

Should you invest in Sovereign Gold Bonds 2020-21 Series III? What is Tax implications?

Government of India in November 2015 has introduced the Sovereign Gold Bond Scheme to give the Investors of India an option alternate to physical gold. It is been considered as substitute to physical gold. Over the years the market has witnessed a decline in demand for physical gold. With the introduction of Sovereign Gold Bond Scheme there is a significant increase in investors as it is an alternate to physical gold. Sovereign gold bond comes under debt fund category.

Sovereign Gold Bond Scheme tracks the import export value of the asset and at the same time ensures transparency at the same time. Sovereign Gold Bond are government securities which means it is safest the than any other investment. Low risk appetite investors can consider in investing in the Sovereign Gold Bond Scheme. Also people who have an affinity with gold can consider to invest in this scheme. The scheme offers fixed income semi-annually. The cost of buying or selling sovereign gold bond is very low or nominal compared to physical gold. In this article we will discuss about the Tax Impact , Features and Benefits of Sovereign gold bond scheme.

Should you invest in Sovereign Gold Bonds 2020-21 Series III Starting 8 June? What is Tax implications?
Should you invest in Sovereign Gold Bonds 2020-21 Series III Starting 8 June? What is Tax implications?

Sovereign Gold bond Scheme- Series III from 8 June 2020

Through Government of India has announced that the Sovereign Gold Bond Scheme 2020-21 – Series 3 will be open for subscription from Monday, June 08 to Friday, June 12, 2020. The Online Bidding Platform for Sovereign Gold Bond Scheme 2020-21 – Series 3 (Tranche 40) will be open for subscription from Monday, June 08, 2020 to Friday, June 12, 2020 for trading members to subscribe to the issue for their clients.

Tenure of the issue: 8th June, 2020 to Friday, 12th June, 2020

Date of allotment: 16th June 2020. 

Issue price: Rs. 4,677 per gram of gold.

Rate of Interest: The scheme currently offers rate of interest of 2.5 % p.a. the Interest is paid semi-annually. The interest is linked to the current market price of the gold.

Minimum bid quantity: 1 gram

Maximum bid quantity: The investor can make a maximum investment of 4 kgs of gold in case of individual and HUF and in case of entities such as trusts and universities investment is maximum of 20 kgs of gold. Investor can apply online through the website of the listed scheduled commercial banks or demat account.

Tenure of bond: 8 years

Comparison of return with Equity Mutual Funds, FDs etc.:

ParticularsSovereign Gold bondsEquity Mutual fundsFixed deposit
Returns
1 Year
2.5% p.a. Interest
45% on Capital
Negative 10 to 13% p.a.3.5% to 7% p.a.
Returns
5 Year
20%5 to 15%3.5% to 8% p.a.
RiskVery lowVery highLow

The investment in Gold has given highest returns in last one years. Investors should allot 20% of savings in Gold. If you dont have gold in portfolio then this is right option to buy online ans save on storage cost and tax on long term capital gains

Tax Implication on Investment in Sovereign Gold bond scheme

Sovereign gold bonds are considered as capital asset as per section 2(14) of the income tax act. The following the tax treatment of sovereign gold bond:

1. Treatment of Interest Income on Sovereign gold bond: Sovereign gold bond offersrate of interest of 2.5 % p.a. The interest is taxable under income tax act, 1961 under the head income from other sources, no TDS is deducted at the time of payment of interest to the investors. The interest is taxable in the hands of individual and HUF as per slab rates.

For Instance, Mr. X has earned Rs. 50,000 interest during FY 2019-20 from sovereign gold bond and other income of Mr. X is Rs. 5,00,000. Assume that Mr. X has made no investment under chapter VI A.

Let us calculate tax liability of Mr. X

ParticularsAmount
Other Income5,00,000
Interest on Sovereign gold bond50,000
Total taxable income5,50,000
Tax on above as per slab rates22,500
Add: Health and Education cess @ 4%900
Total tax liability23,400

2. Treatment of Capital gain on Sovereign gold bond:

The tax treatment of capital gain on sale and redemption of sovereign bonds is as under:

a. Capital gain at the time of Redemption:

When the bonds are redeemed the capital gains arising at the time of redemption is exempt from tax net. The redemption price is based on an average closing price of gold of 999 purity in previous 3 working days.

b. Capital gain at the time of sale of bonds on exchange: The sovereign gold bond is tradeable in the secondary market after 14 days from an initial subscription date, subject to a notice published by the RBI. Prices at which these bonds are transacted depend on the prevailing gold prices on the stipulated date, as well as its corresponding demand and supply in the stock market. Also for making transactions in the stock market, the holding certificate must be converted to demat form in the Demat account of an investor. The capital gain treatment of bond on sale in secondary market is as under:

i. Short term capital gain: If the bonds are sold in the secondary market within 3 years from the date of purchase than capital gain arising on such transfer is treated as short term capital gains and it is taxable at slab rates. Further health and education cess shall be charged at the rate of 4% on the tax liability

ii. Long term capital gain: If the bonds are sold in the secondary market after 3 years from the date of purchase than capital gain arising on such sale is treated as Long term capital gains and it is taxable at 20%. Further health and education cess shall be charged at the rate of 4% on the tax liability.

Click here to read Tax treatment on sale of Physical gold please refer this article:

Features and benefit of Sovereign gold bond scheme:

The following are the various features and benefit of Sovereign gold bond scheme:

a. Who can apply for the scheme: Resident Individuals, HUF, Trusts and Universities are eligible for making investment in Sovereign Gold Bond Scheme. A parent has an option to invest on behalf of his/ her minor child. The investor has option either invest in physical certificate or in demat form. Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity. Joint holding is allowed under this scheme.

b. Minimum Investment: The value of the bonds is calculated in multiples of gram(s) of gold, wherein the basic unit is 1 gram. The investor can make a minimum initial investment of 1 gram of gold, and the Investment can go up to 4 kgs of gold per investor in case of individual and HUF and in case of entities such as trusts and universities investment is maximum of 20 kgs of gold. Payment can be made through cash upto Rs. 20000. Investment more than Rs. 20,000 must be made in cheques/demand draft/electronic fund transfer. Investor can apply online through the website of the listed scheduled commercial banks.

c. Tenure of the scheme: Sovereign Gold bonds are issued for a maximum period of 8 years.

d. Low risk and better returns: Sovereign Gold bond scheme is made for low risk appetite investors who are willing to invest in scheme which offers guaranteed return and also protects your investment as it is a government backed scheme and also governments scheme are considered as one of the safest investment options.

e. Premature withdrawal: The scheme offers premature withdrawal from the 5th year. The investor can take this benefit for the 5th, 6th, and 7th year of bond tenure, and the withdrawal must be processed on the interest disbursement days. In case of premature redemption, investors can approach the concerned bank/ Stock Holding Corporation of India Limited offices/Post Office/agent thirty days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.

f. Trading of Bond: The bond is tradeable in the secondary market after 14 days from an initial subscription date, subject to a notice published by the RBI. Prices at which these bonds are transacted depend on the prevailing gold prices on the stipulated date, as well as its corresponding demand and supply in the stock market. Also for making transactions in the stock market, the holding certificate must be converted to demat form in the Demat account of an investor.

g. Transferable: The bond can be gifted/transferable to a relative/friend/anybody who fulfills the eligibility criteria mentioned in point a. The Bonds shall be transferable in accordance with the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity by execution of an instrument of transfer which is available with the issuing agents.

h. Collateral against loan: Sovereign gold bond are accepted as collateral/ security in case of secured loans. Thus this is treated as gold loan after setting the loan to value ratio to the value of gold. The Loan to Value ratio will be the same as applicable to ordinary gold loan prescribed by RBI from time to time

i. Authorized agencies of the scheme: Bonds are sold through offices or branches of Nationalized Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorized stock exchanges either directly or through their agents. The investor has to follow the same KYC norms and must provide copy of either of the below documents at the time of making investment:

1. Aadhaar card

2. PAN card copy (Compulsory)

3. Driving license

4. Voter ID

5. Passport

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