Anandita was looking out for options to invest her funds. She heard about the new series of sovereign gold bonds and wanted to invest in them. She was told that the tenure of these bonds were 8 years and that it carried an interest of 2.5% pa. Although gold bond seems to be a safe option for investing funds, she is concerned about the liquidity as the period in question is 8 years. One of her friends suggested that gold bonds can be liquidated prematurely and hence it is still a good option. But Anandita would like to know the taxability of the interest and capital gains associated with this option.

Sovereign Gold Bonds (SGB) are government securities denominated in grams of gold and are issued by RBI on behalf of Government of India. Subscription to the first issue of the SGB (FY 21-22) opens on May 17, 2021. It is priced at Rs. 4,777/gram.

Why SGB?

Experts advise investors to hold a small portion of their investment portfolio in gold. Holding gold in physical form has its own flip side. Making charges of gold jewellery or coins and recurring storage cost are a few non-value add costs incurred by investors. From this stand point SGB looks very attractive. Apart from addressing the concerns of holding gold in physical form, it also earns a fixed interest on your investment.

One should keep in mind that the spot price for gold is at its lowest in the last 10 months

Taxability

INTEREST

SGB offers a fixed interest of 2.5% per annum which is paid half yearly. Interest income on SGBs are taxed at regular slab rates. But no TDS will be applicable for this interest. Investors who fall in the higher tax bracket need to be prepared on this front.

Since TDS will not be deducted, while doing the advance tax calculations, one needs to keep in mind that a provision be made for this component.

CAPITAL GAINS:

Although SGBs have a lock-in period of 8 years, they can be prematurely redeemed from the 5th year. Though this is a good news for people looking for “liquidity” in investments, one should keep in mind that the capital gains on maturity of these bonds (after 8 years) is completely tax-free, while capital gains on prematurely redeemed bonds would be taxed at 20% after indexation

Exit Options

An investor has an option to exit by prematurely redeeming it from the 5th year onwards. Alternatively the bonds are tradable in stock exchanges from a date to be notified by RBI.

How can we help you?

Various clauses from the Income Tax Act may be simplified in online contents. But most of the time, it requires professional help in identifying suitable route for specific instances. Similar to nurturing and taking care of personal health, it is important to also keep a tab on one’s financial health. We at Chockalingam Unnamalai & Associates, can help you understand the pros and cons of various choices you make in the context of personal taxation. You can bank on us for a stress free tax filing and related compliances.

Call us at +91 73050 56628 or drop a mail to frontoffice@onesourcevault.com

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CA Chockalingam K
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