Sovereign Gold Bonds (SGBs) are popular because they combine gold price exposure with fixed annual interest. While many investors buy SGBs during primary issuance, an increasing number purchase them from the secondary market through stock exchanges. Sometimes these bonds trade at a discount to the prevailing gold price, making them appear attractive.
However, taxation rules differ depending on how and when you buy or redeem SGBs. Many investors misunderstand the tax implications of buying from the secondary market, especially when holding till maturity or selling before maturity.
How SGB Taxation Works in General
When SGBs are held until maturity (which is typically eight years), capital gains on redemption through the issuer are exempt from tax for individual investors. This exemption is one of the biggest advantages of SGBs over physical gold or gold ETFs.
In addition, the fixed annual interest received on SGBs is taxable as per your income tax slab. Therefore, while capital gains may be exempt at maturity, interest income is always taxable.
Understanding this distinction is critical before making any purchase decision.
What Changes When You Buy From the Secondary Market
When you purchase SGBs from the secondary market instead of the primary issue, the capital gains exemption still applies if you hold the bond until maturity and redeem through the government. However, the cost of acquisition becomes your purchase price in the secondary market.
If you sell the bond on the exchange before maturity, capital gains tax applies based on holding period classification. Short-term gains are taxed as per applicable rates, while long-term gains may qualify for indexation benefits depending on prevailing tax rules.
This difference significantly affects exit planning.
Example to Understand the Tax Impact
Suppose an SGB is trading below current gold price in the secondary market. You purchase it at ₹5,200 per unit while the original issue price was ₹5,000. If you hold it until maturity and redeem through the issuer, capital gains on appreciation are generally exempt, regardless of whether you bought it in the primary or secondary market.
However, if you sell the bond on the exchange before maturity at ₹5,800, your capital gain will be calculated on the difference between ₹5,800 and ₹5,200. Tax will apply depending on whether the holding period qualifies as long-term or short-term.
The tax outcome changes based on your exit route.
Liquidity vs Tax Efficiency Trade-Off
Buying SGBs from the secondary market may offer price advantages, but liquidity can sometimes be limited. Low trading volumes may result in wider bid-ask spreads, which reduce effective returns.
Holding until maturity offers maximum tax efficiency due to capital gains exemption. Selling early for liquidity may trigger tax liability and reduce net profit. Investors must decide whether liquidity or tax efficiency is more important in their financial plan.
Interest Income and Its Tax Treatment
The fixed annual interest earned from SGBs is taxable under “Income from Other Sources.” This interest does not qualify for tax exemption even if capital gains are exempt at maturity.
Investors should include this interest in annual income while filing returns. Ignoring it can lead to mismatches in reporting and potential notices.
Should You Buy SGB From Secondary Market?
Buying from the secondary market makes sense when bonds are trading at a meaningful discount to gold prices and you intend to hold them until maturity. In such cases, you benefit from both price advantage and capital gains exemption at redemption.
However, if your intention is short-term trading based on gold price movement, taxation may reduce effective returns. In that case, gold ETFs might offer better liquidity despite different tax treatment.
Common Mistakes Investors Make
Many investors assume that all SGB transactions are fully tax-free. This is incorrect. Only capital gains on maturity redemption enjoy exemption. Selling on exchanges triggers standard capital gains taxation.
Another mistake is ignoring liquidity constraints and focusing only on discount pricing. Poor execution price due to low trading volume can offset perceived gains.
Conclusion
Buying SGBs from the secondary market can be a smart strategy if aligned with long-term holding until maturity. The major advantage remains capital gains exemption at redemption through the issuer. However, selling before maturity changes the tax treatment and may reduce net returns.
Investors must clearly define their holding period and exit plan before purchasing. Tax efficiency in SGBs depends more on how you exit than how you enter.
FAQs
Are SGBs tax-free if bought from the secondary market?
Capital gains are exempt only if you hold the bond until maturity and redeem through the government. Selling on the exchange before maturity is taxable.
Is interest earned on SGB taxable?
Yes, the fixed annual interest is taxable as per your income tax slab.
Does buying at a discount affect tax calculation?
Yes, your purchase price becomes the cost of acquisition for capital gains calculation if you sell before maturity.
Should I trade SGBs for short-term gains?
SGBs are generally more tax-efficient when held until maturity. Short-term trading may reduce benefits due to capital gains taxation and liquidity limitations.