If the Sovereign gold bonds are held till maturity, the redemption is exempt from capital gains only for individuals.
The redemption or transfer of SGB in the case of investors other than individuals is taxed as LTCG at the rate of 20% with indexation benefit or STCG at slab rates based on the period of holding.
And the interest earned will be taxable under the head Income from other sources.
You say this without qualifying it with the duration of holding in the article that you linked in your original post. I thought this might have been an oversight, but now you repeat this same statement here in this comment as well.
Why do you say that all gains obtained by selling SGB in the secondary market are considered as long term capital gains irrespective of the duration for which the SGB is held? Is this really the case? If so, that is really curious: even for equity-oriented instruments we need to hold them for at least an year before they become long-term assets. Could you point me to a source which says all capital gains from sales of SGB are taken as long term capital gains for the purpose of tax computation? Thank you.
The Capital Gain on redemption or sale of SGB is classified based on the period of holding. Thus, it would be taxed as LTCG at 20% with the benefit of indexation if held for more than 12 months and as STCG at slab rates if held for up to 12 months. We have updated the same in the article too.
Thanks for fixing this. I have one more question about your answer:
Could you give a source for this 12 month holding duration? As far as I know, only equity-based instruments have 12 months as the holding duration for qualifying as long-term assets, everything else (land, debt-based instruments) have longer terms.
I could not find mention of this 12 month duration in the RBI FAQ about SGBs (https://rbi.org.in/Scripts/FAQView.aspx?Id=109), and since these qualify as a loan to GoI, my hunch is that the terms for debt instruments apply. So I would assume that one needs to hold these for 36 months for them to become long-term for capital gains purposes.
Perhaps there was a circular by the IT department, or a ruling, or some such on which you are basing the 12-month duration? If so, could you please point to that? Thank you.
Edited to add: I did some more digging, and now I have some evidence to support my hunch about the 36 month holding duration for SGBs to qualify as long-term assets:
No STT is payable on the purchase or sale of SGBs, as per this brochure from BSE. Given that a thumb rule to resolve the 12/36 months question is to see if STT was paid on the sale of the instrument (if STT was paid, then 12 months; else 36 months), this suggests to me that 36 months is the correct duration for SGBs.
The same brochure explicitly says (see the comparison table on page 3) that LTCG tax is applicable if sold after 3 years.
This brochure is (as far as I can see) undated, so perhaps there was a more recent circular/ruling/announcement/… which specified the 12 month limit? If so, could you please point me to that, @Quicko ? Thank you!
While payment of STT has relevance in determining whether or not concessional rates of tax apply in case of certain classes of securities [shares, equity oriented mutual funds etc.,], it does not have any bearing on the period of holding of a capital asset.
Going by the definition given by the Income Tax Act for a long term and short term capital asset, all listed securities [with the exception of units of debt-oriented mutual funds] shall be classified as long term capital assets, if held for a period of more than 12 months. [Clauses (29A) and (42A) of Section 2 - Income Tax Act]
As per this page* on taxation by AMFI (search for ‘securities’), STT is payable only on the sale of equity-oriented MFs, not on the sale of debt-oriented MFs.
Now consider the following situation: I bought 100 units of UltraMagic Balanced Advantage Equity fund on August 1, 2019, and sold all 100 units on September 1, 2020, hence holding it for more than 12 months, but less than 36 months. Since the debt:equity composition of Balanced Advantage funds is not fixed, how do I figure out if I can treat my sale as a sale of equity mutual funds (thus falling under a long-term capital asset sale, and getting the advantageous tax treatment under 112A) or as debt mutual fund sale (hence: no special tax treatment, since it is not long-term yet)?
An easy way to see this is to check if the fund house deducted and paid STT on the sale transaction. If it did, that means the fund house treated the units as equity fund units, so I can do that too. If STT was not paid on the sale, then I have to treat these as short-term capital gains, because the fund house clearly considers these to be debt funds. And since the fund house (ostensibly) knows what the relevant debt:equity composition is, I can use their payment of STT as an easy way of distinguishing the “equity vs debt” question.
Now: does the levy of STT affect the length of time that I can/should hold these MF units? No. Does it help me in figuring out whether the units became long-term assets after I have made a sale? Yes. Hence, “thumb rule”.
As per (42A), any asset held for at most 36 months is a short-term asset, unless it belongs to one of a few exceptions listed there. The way I understood this, the default is to consider any asset held for at most 36 months as a short-term asset. If an asset held for such a duration has to qualify as not short-term, it has to be explicitly called out in the section (or elsewhere in the law/rules). That is, the section first classifies all <=36-months assets as short term, and then explicitly lists out exceptions to this rule. Note that this interpretation (which could very well be wrong!) contradicts the sense of what you said above.
And the exceptions which are listed in (42A) as qualifying for the 12-month rule are: “a security (other than a unit) listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or a unit of an equity oriented fund or a zero coupon bond”. SGB is none of these, as far as I understand. Perhaps SGB has been included by some other notification/rule/law/… ; I could not find any such.
Given the evidence seen so far, I would be very wary in reporting gains from SGBs sold after holding them for 12 months (and before 36 months), as LTCG.
[*] Sorry, couldn’t find a more authoritative source, though this statement is repeated across a lot of respectable websites.
My bad for not conveying precisely what I had meant. While you do have a very valid point, what I should have also mentioned was that, the relevance of STT in determining the 12 (or) 36 months period of holding is limited just to units of mutual fund schemes. While this principle can be used in a few scenarios, I would say that it is more like an exception rather than the norm.
To prove my point, you could transfer listed equity shares in an off-market transaction and not pay STT and still by virtue of it being listed, 12 months would still be the period for determining whether it is a long term/short term asset. Also, debentures sold in a stock exchange do qualify for the shorter period of holding, even though it is a debt product and STT is not chargeable on such sale.
Coming to this, Explanation 2 to Clause (42A) of section 2 states the following: For the purposes of this clause, the expression “security” shall have the meaning assigned to it in clause (h ) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
The term “security” as defined under Section 2 of SCRA, includes government securities.
And as per the same section [clause (b) to be precise], “Government security” means a security created and issued, whether before or after the commencement of this Act, by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944)
And as per the Government Securities Act, 2006 [which for most purposes has superseded the Public Debt Act, 1944], SGB is a “government security”. RBI has also clarified to this extent, in an old circular.
Finally, SGBs are listed on stock exchanges, and so to summarise, SGBs do qualify for the shorter period of 12 months for the purposes of determining whether it is a long term or short term capital asset.
The definition of Long Term Capital Asset as per Section 2(29A) of the Income Tax Act is a capital asset which is not a short-term capital asset.
The definition of Short Term Capital Asset as per Section 2(42A) of the Income Tax Act mentions period of holding of 12 months in case of a security (other than a unit) listed in a recognized stock exchange in India.
The definition of Securities as per Section 2(14) of the Income Tax Act is the meaning as per Section 2(h) of the Securities Contracts (Regulation) Act, 1956
The definition of Securities as per Section 2(h) of SCRA Act includes government securities
It will come to your bank account, provided the SGB is in your demat account before the date of interest payment.
If the SGB is “in transit” on the due date of interest payment, because you bought it close to the due date, I am not sure where the money will go. I assume that it would go to Zerodha in some manner, with instructions to pass it on to you. I have no experience with this; I am basing this assumption on how dividends are paid for shares which are “in transit” because they were bought close to the record date.
The dates are based on when each SGB was originally issued. So, not uniformly Sep and Mar. There is a thread on these forums where someone has very helpfully collected this information for most of the SGB which are currently in circulation. I don’t have the link with me; you should be able to find it if you search the forum.
Nakul Kulkarni, Business Analyst at Zerodha, says that “buying SGBs in secondary market and holding till maturity or redemption from secondary market or RBI’s buy back route will attract a long-term capital gains tax of 20 percent (for holding period of more than 36 months).”
But I am also interested in knowing about this. From what I am able to find, there is little clarity about this currently. I have seen various articles which claim that capital gains will not be exempt for secondary market purchases (one such article led to question my initial assumptions that they were exempt in this forum thread). But on the other hand, on Twitter, people still believe that capital gains are exempt on secondary market purchases of SGBs -
The meaning of Long Term Capital Asset as per the Income Tax Act is reproduced below:
Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.
However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India, units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Hence, the SGB being in nature of government securities and if holding period is more than 12 months, then it shall be treated as long term capital asset.
Moreover, Any capital gains arising to an investor other than Individual on the redemption of SGBs (whether on maturity or pre-mature redemption) shall be taxable as a long-term capital gain. As SGBs are listed on stock exchanges in India, the investor has an option to compute the capital gain with or without taking the benefit of indexation. If the benefit of indexation is taken, then tax shall be charged at the rate of 20% otherwise at the rate of 10%.
However, classification of capital gain or holding period can be ambiguous and may differ from tax experts.
@Quicko the question was not about the definition of long term, the question was about whether you need to pay tax if you buy SGB from secondary markets and then redeem them with RBI. As per Nakul in the above article, you need to pay tax. As per your site, tax is exempted. Can you confirm my understanding?