If you buy Sovereign Gold Bonds (SGBs) from the secondary market and hold them until maturity, you stand to benefit from 100% exemption on capital gains and guaranteed interest income, making it an attractive long-term investment.
Key Benefits of Holding Secondary Market SGBs to Maturity
Investing in SGBs from the secondary market and holding them through their full 8-year tenure offers distinct advantages, primarily centered around tax efficiency and steady returns.
1. Zero Capital Gains Tax at Maturity
One of the most significant advantages for investors holding SGBs purchased from the secondary market until their full 8-year maturity is the complete exemption from capital gains tax. This means any appreciation in the value of the SGB, linked to the price of gold at redemption, will not be subject to income tax. This makes SGBs uniquely positioned as a tax-efficient way to invest in gold for the long term.
2. Assured Interest Income
Regardless of gold price movements, SGBs provide a fixed interest rate of 2.50% per annum on the initial investment amount. This interest is paid semi-annually and is a consistent source of income throughout the bond's tenure. While this interest income is taxable as per your income tax slab, the capital gains exemption at maturity often outweighs this.
3. Protection Against Gold Price Volatility
By holding to maturity, you benefit from the prevailing gold price at the time of redemption, which is based on the simple average of the closing price of gold of 999 purity of the previous three business days from the date of repayment, published by the India Bullion and Jewellers Association Ltd (IBJA). This eliminates the need to worry about the daily fluctuations or the complexities of physical gold premiums and storage.
4. Flexibility Before Maturity
While the intent is to hold till maturity, SGBs offer considerable liquidity. You have the flexibility to sell your SGB in the secondary market at any point in time if your financial circumstances change, without the obligation to wait for the initial 5-year lock-in period associated with primary market SGBs' early redemption option. This provides an exit route should you need to liquidate your investment earlier.
How Secondary Market SGBs Work
When you buy SGBs from the secondary market (stock exchanges), you are essentially purchasing them from another investor. The price at which they trade can sometimes be at a discount or premium to the prevailing gold price, offering potential entry points for investors.
Example Scenario:
Imagine you buy an SGB from the secondary market that was originally issued at ₹5,000 per gram, but you acquire it for ₹4,900 per gram because the market price of gold dipped temporarily or another investor needed to sell quickly.
- You hold this SGB for the remaining term until its 8-year maturity.
- You receive 2.50% annual interest (on the initial issue price, not your purchase price) semi-annually.
- At maturity, if the redemption price of gold is ₹6,500 per gram, you receive ₹6,500 per gram.
- The entire gain of (₹6,500 - ₹4,900) = ₹1,600 per gram is 100% tax-exempt.
Important Considerations
- Demat Account: To buy SGBs from the secondary market, you need a demat account and a trading account with a registered stockbroker.
- Interest Taxation: The 2.50% annual interest is added to your income and taxed as per your applicable income tax slab. Tax Deducted at Source (TDS) is not applicable on SGB interest.
- Liquidity: While SGBs are listed on exchanges, liquidity can sometimes be low for certain issues. However, if your strategy is to hold till maturity, this is less of a concern.
- Nomination Facility: SGBs come with a nomination facility, ensuring a smooth transfer to your chosen nominee in case of unforeseen circumstances.
Comparison: Secondary Market vs. Primary Market SGBs
| Feature | Secondary Market SGBs | Primary Market SGBs |
|---|---|---|
| Purchase Price | Can trade at a discount or premium to current gold price | Fixed price (average of last 3 working days prior to issue) |
| Availability | Available anytime during market trading hours | Available only during specific subscription windows |
| Capital Gains | 100% tax-exempt if held till 8-year maturity | 100% tax-exempt if held till 8-year maturity |
| Interest Rate | 2.50% p.a. (on issue price) | 2.50% p.a. (on issue price) |
| Exit Flexibility | Can be sold anytime on exchange, no 5-year lock-in | Early redemption allowed after 5th year (interest payment date) |
| Transaction Fees | Brokerage charges apply | No brokerage charges |
| Minimum Investment | 1 gram of gold | 1 gram of gold |
Conclusion
Buying Sovereign Gold Bonds from the secondary market and holding them until maturity is an excellent strategy for long-term investors seeking capital appreciation linked to gold prices, coupled with a fixed interest income, and, most importantly, complete exemption from capital gains tax at the 8-year maturity. It combines the safety of a government-backed instrument with the benefits of gold investment, all while offering considerable tax efficiency and flexibility.
For more information, you can refer to the official guidelines by the Reserve Bank of India.
