Sovereign gold bonds: Why HUFs Face 12.5% LTCG on redemption but individuals get tax exemption

Sovereign Gold Bonds

• Early SGB redemption by individuals is tax-free, not treated as capital gains
• SGBs redeemed by HUFs attract 12.5 percent long-term capital gains tax

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Today’s Ask Wallet-Wise explains why sovereign gold bonds, issued by the Reserve Bank of India (RBI), redeemed by an individual after five years is not treated for computing capital gains but 12.5 percent LTCG applies on the investment in the name of Hindu Undivided Family (HUF).

Ask Wallet-Wise initiative offers expert advice on matters related to personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try to get a top financial expert to address.

I have bought Sovereign Gold Bond (SGB) 2020-21 Series-X subscriptions in my name and in the name of my HUF. The RBI has announced that investors can redeem these bonds from January 19, 2026, after the completion of the fifth year of subscription. With the recent surge in gold prices, I have decided to avail of the early redemption, instead of waiting for the completion of its original tenure of eight years. What are the tax implications if I avail the early redemption window?

Expert’s Advice: Sovereign Gold Bonds (SGB) were issued by the Government of India to conserve foreign exchange and at the same time, offer investors an opportunity to invest in gold. The original tenure of the SGB is eight years but investors can tender their bonds for early redemption after five years of issuance on the half-yearly due date for interest payment.

The redemption rate of the SGB is announced by the RBI using the simple average of the closing price of 999 purity gold as published by the Indian Bullion and Jewellers Association for the three business days preceding the redemption date.

Capital gains accrue when a capital asset is sold or transferred. The income tax law provides that the redemption of SGB with RBI by an individual investor shall not be treated as a transfer for computing capital gains. This applies not only to redemption on maturity but also to early redemption after five years.

Since this is not treated as a transfer for income-tax purposes, the whole of the redemption proceeds will come tax-free in the hands of investments made in your individual name. The provision of not treating the redemption of SGB with RBI as a transfer is applicable only for an individual investor, and thus the exemption extends only to the individual investor.

Therefore, you will have to pay long-term capital gains tax at 12.5 percent on the difference between the redemption price and issue price of the investment made in the name of your HUF.

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