If I buy SGB in secondary market and hold for 3 to 4 year and held till maturity in this case I need to pay capital gain tax or tax free?
In order to be eligible for exemption from capital gains tax, the SGBs need to be held till maturity (i.e 8 years), this is possible only if it purchased from the primary market from the RBI.
Any purchase from another person through secondary market will attract capital gains tax IMO
U can refer this FAQ from RBI
@Quicko can confirm this.
EDIT: I Believe applying for SGBs through broker platform too is considered secondary market, so to remove confusion, if the SGBs are purchased from any other person other than the RBI through secondary market, it will be taxed.
Thanks and what is IMO means?
It is a short form of : In My Opinion (IMO)
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RBI faq states redemption with RBI is tax free.
RBI redemption happens on maturity or else when they ask if you want to sell after 5 years. First part is tax free, second part is how you interpret the FAQ.
This was discussed here
and in some other threads as well
Yes, the RBI FAQs on the taxability is a bit ambiguous and is open for interpretation, I believe the premature redemption (anytime after the 5th year but before maturity) will be taxed, as they are not considered as redemption, rather they are considered as premature redemption.
And as common sense would have it, the benefits of tax exemption are provided, so as to ensure that the funds are locked in for 8 years, so that they can be utilised by the government for its funding requirements.
Let’s take the example of term deposits, as in the case of term deposits, penalties are involved if funds are withdrawn earlier than the maturity date, similarly for premature redemption of SGBs the government penalises by not providing tax exemption, so as to deter early redemption.
So, although there could be contrasting views, IMO tax exemption is applicable only if they are held till maturity for the full term of 8 years.
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Hey @Ravi_Shankar,
If it is redeemed with RBI on maturity, the capital gains will be exempted from taxes.
I don’t think redemption with the RBI can be considered as the only criteria for granting capital gains tax exemption.
This would mean that the holding period is not taken into consideration.
Can I hold for just one year by purchasing it on the 7th from secondary market and redeem it with RBI in the 8th Year to avail the tax exemption, i don’t think so.
The RBIs FAQ is clear on the fact that the moment the SGBs get transferred to anyone else via the secondary market, it loses the capital gains tax exemption.
This can be understood from the following line from the FAQ
“The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond”
The only time indexation would matter is if the gains or taxed, if the gains are not taxed, then the concept of indexation has no relevance.
The redemption with RBI is one aspect, but holding till maturity(8 years) seems to be the key eligibility of capital gains tax exemption.
I don’t think government’s intention was to grant exemption by merely redeeming it with RBI irrespective of the holding period, the intention would have been to assure the lock in of the funds till it’s maturity.
I think at the time of filing tax only we can come to know. Any how thanks for your insights thanks
The RBI FAQs are clear on this. They say:
The capital gains tax arising on redemption of SGB to an individual has been exempted.
You are over-analyzing this and making a simple thing, complicated.
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My intention was only to break down the logic behind granting exemption, i am not complicating anything, it is the provision or FAQ that lacks clarity and remains ambiguous or open for interpretation.
Redemption is a simple word , i can hold the SGBs during the last one year of the tenure by purchasing it from someone in the 7th year and redeem it with RBI, does it mean my gains are exempt? I don’t think so.
Anyways, I was just expressing my opinion and there can be disagreements
You can checkout out the following articles that back my opinion
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But why don’t you think so, even though the sentence in the FAQ is unambiguous?
To phrase this another way: The FAQ doesn’t say about whether gains from SGBs purchased from the secondary market on Mondays are exempt from tax on redemption. Would you think that therefore, it is reasonable to worry whether it is OK (from the point of view of reducing taxes) to buy SGB from the market on Mondays?
The statement in the FAQ is as black-and-white as it can be.