Sovereign Gold Bonds: The Real Tax Advantage Lies In Holding Till Maturity

With gold at record highs, many investors are reconsidering their Sovereign Gold Bonds strategy. But redeeming early could trigger capital gains tax under the proposed 2026 rules. We take a look.

Liquidity Needs Vs Tax Efficiency

This decision depends on various factors such as the date of investment into these bonds, tax appetite, your current and future financial and liquidity needs, and your goal. In case you need liquidity or want to diversify, now would be a good opportunity since this could fetch a good return.

“However, there will be an income tax associated with it. With recent changes proposed in the 2026 budget, in case Sovereign Gold Bonds (SGBs) are redeemed before full maturity, these will be taxed as capital gains tax in the hands of the taxpayer. This is regardless of whether you are the original subscriber or purchased through the secondary market,” says Ritika Nayyar, partner, Singhania & Co.

If you do want to reap maximum benefits with the least tax, you must be the original subscriber and should hold till maturity; else, you will end up paying capital gains whenever you choose to redeem before the maturity period of eight years.

The tax architecture of SGBs operates on a clear bifurcation between capital appreciation and interest, and it is this asymmetry that ultimately determines post tax returns.

“The redemption component, for original individual subscribers holding to maturity, is statutorily excluded from the ambit of 'transfer' and therefore escapes capital gains taxation in entirety, even where the appreciation constitutes the overwhelming bulk of the return. In contrast, the 2.5 per cent coupon is taxed annually under the head “Income from Other Sources” at slab rates, without the benefit of concessional treatment or  Tax Deducted at Source (TDS), thereby requiring active disclosure and advance tax compliance,” says Shivam Kunal, senior associate, B Shanker Advocates LLP.

The Real Tax Trigger Is Capital Gains, Not Interest

However, in economic terms, the tax on interest has only a marginal dilutive effect on overall returns, since the interest accrues on the initial investment and typically constitutes a small fraction of the total gain. “The material inflection arises only where the capital gains exemption is lost, either due to premature redemption post 1 April 2026 or acquisition in the secondary market, in which case the 12.5 per cent levy on long-term gains significantly erodes post tax yield. The comparative tax burden in such cases is not incremental but structural, with the capital component shifting from exempt to taxable,” says Kunal.

Consequently, the real advantage of SGBs lies not in the interest stream, which remains modest and taxable, but in preserving the tax-free character of capital appreciation. The interplay of these two components underscores that the timing and manner of exit are determinative of effective returns, far more than the nominal coupon itself.