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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallIn India, Sovereign Gold Bonds (SGBs) have two separate tax streams: the 2.50% annual interest is taxable, while a capital gain on redemption at the scheduled eight-year maturity is exempt only in a narrowly defined case from 1 April 2026. You must have subscribed as an individual at the original issue and held the bond continuously until maturity. A bond bought on an exchange, or one redeemed through the Reserve Bank of India (RBI) after five years, does not qualify for that maturity exemption.
The three tax questions to keep separate
Every SGB exit can involve (1) interest, (2) a capital gain or loss on the bond’s value, or (3) both. The exemption introduced for tax year 2026–27 onward applies only to the capital-gains component of an eligible maturity redemption. It does not turn the coupon into tax-free income.
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- Interest: 2.50% a year on the bond’s nominal value, paid in two instalments. RBI scheme terms state that this interest is taxable under the Income-tax Act.
- Scheduled maturity: normally eight years from the issue date. A qualifying individual’s capital gain on redemption at maturity is exempt under Section 70(1)(x), subject to the original-subscription and continuous-holding conditions.
- RBI premature redemption: available on an interest-payment date after the fifth year. The resulting capital gain is not covered by the maturity exemption.
- Exchange sale: a transfer of the bond. A sale before redemption is dealt with under the ordinary capital-gains rules applicable to the relevant tax year and your facts.
How SGB interest is taxed
Coupon rate and payment schedule
RBI’s scheme FAQ specifies a fixed coupon of 2.50% per annum on the nominal investment. Interest is paid every six months, with the final interest instalment paid along with the principal at maturity. For example, an investment with a nominal value of ₹1,00,000 produces ₹2,500 of interest over a full year, normally split into two ₹1,250 payments.
The coupon is a separate income stream from any change in the gold-linked redemption value. RBI’s scheme terms say: “Interest on the Bonds shall be taxable as per the provisions of the Income-tax Act.” Therefore, an investor cannot claim that a capital-gains exemption makes the half-yearly interest tax-free. Include the interest received, or credited where applicable, in the tax return for the year in which it is taxable under the applicable provisions.
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What the interest exemption does not cover
Section 70(1)(x) concerns capital gains on redemption under the specified SGB conditions. It does not exempt the 2.50% coupon. Keep interest statements and bank credits separately from documents supporting the bond’s purchase cost and exit value.
Scheduled maturity after the 2026 change
Normal eight-year tenor
RBI describes SGBs as having an eight-year tenor. At the scheduled maturity date, the issuer redeems the bond. The redemption price is linked to gold: RBI uses the simple average of the closing prices for 999-purity gold for the preceding three business days, with the prices published by the India Bullion and Jewellers Association (IBJA). Interest, in contrast, is calculated on nominal value rather than on that changing gold price.
Who receives the capital-gains exemption
For tax year 2026–27 onward (the amendment applies from 1 April 2026), Section 70(1)(x) exempts the capital gain on redemption only when all of these conditions are met:
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- You are an individual.
- You subscribed to the SGB at the time of its original issue, rather than acquiring it from another holder.
- You held it continuously from the original issue date until redemption on the scheduled maturity date.
- The instrument is an RBI SGB issued under the 2015 scheme or a later SGB scheme covered by the provision.
The Income Tax Department’s Budget 2026 FAQ states: “the exemption from capital gains tax shall be available only where the Sovereign Gold Bond is subscribed to by an individual at the time of original issue and is held continuously until redemption on maturity.” The word “continuously” matters: a transfer to another person, or an acquisition after the original issue, breaks the statutory route to exemption.
What remains taxable at maturity
Even when the capital gain on an eligible maturity redemption is exempt, the 2.50% interest remains taxable. Treat the two amounts as separate entries when reconciling your statements and preparing the return.
Premature redemption through RBI after five years
When the RBI window opens
RBI permits premature redemption after completion of the fifth year from the issue date, but only on an interest-payment date. This is an issuer redemption, not an exchange transaction. The redemption price is calculated using the simple average of the closing price of 999-purity gold for the preceding three business days, as published by IBJA.
Why five years does not mean tax-free
The five-year rule is an operational eligibility rule. It is not an extension of the eight-year maturity exemption. The Budget 2026 FAQ answers the question directly: “No, the exemption shall apply only where the Sovereign Gold Bond is held continuously until redemption on maturity. Premature redemption, even after completion of the prescribed lock-in period, shall not be eligible for exemption.”
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Accordingly, calculate the capital gain or loss on an RBI premature redemption under the general capital-gains provisions that apply to the relevant tax year and taxpayer. Do not report the result as exempt merely because the bond was held for more than five years. Interest received during the holding period remains subject to the ordinary interest-tax rule.
Exchange sale or secondary-market purchase
A market sale is a transfer
If you sell an SGB on a stock exchange before redemption, you have transferred the bond to another buyer. The Budget 2026 FAQ expressly says: “No, the exemption shall not apply to Sovereign Gold Bonds acquired through transfer or purchase in the secondary market.” The exclusion applies to a bond acquired from another holder, regardless of how long the new holder keeps it before a later redemption.
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A pre-redemption exchange sale is therefore tested under the ordinary capital-gains rules in force for that tax year. The applicable holding-period treatment, rate and reporting outcome can depend on the transaction date, the route of sale and your taxpayer circumstances. Because those rules can change, use the law and return instructions for the relevant year or obtain professional advice rather than applying a permanent rate from an older article.
Records to preserve
- Original issue application, allotment advice or certificate showing the issue date and nominal value.
- Demat statements or other holding records establishing whether you subscribed at original issue and whether ownership was continuous.
- Exchange contract notes showing purchase date, sale date, quantity, price and brokerage for a market transaction.
- Bank statements and interest statements showing each coupon payment.
- RBI or intermediary redemption advice for a premature or maturity redemption.
These records let you distinguish interest from capital gain and demonstrate whether the statutory original-subscription condition is met.
Tax treatment by exit route
| Route | How the bond was acquired | Exit timing | Capital-gains treatment | Interest treatment | Key evidence |
|---|---|---|---|---|---|
| Scheduled maturity | Individual subscribed at original issue | Eight-year maturity | Capital gain exempt from 1 April 2026 only if held continuously until maturity and covered by Section 70(1)(x) | 2.50% coupon remains taxable | Issue record, continuous holding statements, redemption advice, interest statements |
| RBI premature redemption | Original issue or another eligible holding, subject to your facts | On an interest-payment date after year five | Not eligible for the maturity exemption; apply general rules for the relevant year | Coupon remains taxable | Issue date, redemption date, RBI price advice, cost records, interest statements |
| Exchange sale | Original issue or secondary-market purchase | Sale date chosen by the holder, before redemption | Transfer taxed under the ordinary capital-gains rules for the relevant year; no automatic maturity exemption | Coupon received while held remains taxable | Contract note, purchase cost, sale value, dates, brokerage and demat trail |
| Secondary-market holding carried to a later redemption | Purchased or acquired by transfer after original issue | Later redemption, including at the instrument’s maturity date | Budget 2026 FAQ excludes bonds acquired by transfer or purchase in the secondary market from the exemption | Coupon remains taxable | Transfer documents, purchase contract note, holding statements and redemption advice |
Worked illustrations
Original subscriber who waits eight years
An individual subscribes for ₹1,00,000 at an original issue and keeps the bond without any transfer until the scheduled eight-year maturity. The investor receives the 2.50% coupon during the holding period; those interest payments remain taxable. At maturity, the gold-linked redemption amount may exceed ₹1,00,000. From 1 April 2026, the capital gain on that redemption is exempt if the statutory conditions are satisfied. The exemption does not erase the interest entries.
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Original subscriber who redeems in year six
The same investor uses the RBI premature-redemption facility in year six on an eligible interest-payment date. The exit is earlier than scheduled maturity, so the Section 70(1)(x) maturity exemption does not apply. Any capital gain or loss must be handled under the general rules for that tax year, while the coupons remain taxable.
Investor who buys on an exchange
An investor buys an SGB from another holder through the exchange and later keeps it until the bond’s stated maturity. The Budget 2026 FAQ excludes a bond acquired by transfer or secondary-market purchase from the exemption. The investor must therefore apply the capital-gains rules applicable to that acquisition and redemption; the original holder’s subscription history cannot be inherited to create the exemption.
How to prepare the return
- Identify the event: classify the amount as a half-yearly coupon, RBI premature redemption or exchange transfer, or scheduled maturity redemption.
- Check the tax year: the amended exemption applies from 1 April 2026 for tax year 2026–27 onward. Earlier transactions may require transitional analysis under the law then in force.
- Verify eligibility: for a claimed maturity exemption, confirm individual status, original-issue subscription and uninterrupted holding through the maturity date.
- Separate amounts: report taxable interest independently from any capital gain or loss calculation.
- Calculate using contemporaneous records: use the documented cost, proceeds, dates and expenses. For an exchange sale, retain the contract note; for RBI redemption, retain the redemption advice and the stated pricing basis.
- Apply the current rules: do not assume that a rate, holding-period test or form from a previous tax year still applies. Check the return instructions for the year of the transaction or consult a tax professional.
Common mistakes and corrections
- “All SGB returns are tax-free.” Correction: only the qualifying capital gain on scheduled maturity can be exempt; interest is taxable.
- “Five years is the tax-free maturity date.” Correction: year five only opens RBI’s premature-redemption window on an interest-payment date; the maturity exemption requires scheduled maturity.
- “Holding an exchange-bought SGB until maturity restores the exemption.” Correction: the Budget 2026 FAQ excludes bonds acquired by transfer or secondary-market purchase.
- “The redemption price is based on the coupon.” Correction: interest is calculated on nominal value, while the RBI redemption price uses the three-business-day simple average of 999-purity gold closing prices published by IBJA.
- “One old capital-gains rate applies forever.” Correction: rates and holding-period rules can change with the tax year and depend on the transaction and taxpayer facts.
What the 2026 rule means in practice
The safest decision framework is to identify both how you acquired the bond and how you exited it. Original issue plus uninterrupted ownership plus scheduled eight-year maturity can produce an exempt capital gain from tax year 2026–27 onward. Any one of the following points you away from that result: a secondary-market acquisition, a transfer before maturity, or RBI premature redemption after year five. None of those routes changes the separate taxability of the 2.50% interest.
Because the amendment starts on 1 April 2026, a transaction spanning that date should be reviewed by tax year rather than labelled solely by the bond’s issue year. Keep the complete ownership and payment trail so that the exemption claim, or the general capital-gains calculation where it does not apply, can be supported.
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