Budget 2026 Removes Tax Benefit for Secondary Market Sovereign Gold Bond Investors
The Union Budget for the fiscal year 2027 has introduced a significant change in the taxation framework for sovereign gold bonds (SGBs), specifically targeting investors who purchase these instruments through secondary markets. From April 1, 2026, the capital gains tax exemption at redemption will be exclusively available to investors who bought the bonds during primary issuance and maintain continuous ownership until maturity.
Understanding the Primary vs. Secondary Market Distinction
Himank Singla, partner at SBHS & Associates, clarifies the crucial difference between primary and secondary buyers. A primary buyer subscribes to the bond during the original Reserve Bank of India (RBI) issuance window through authorized channels such as banks, post offices, or designated online platforms. In contrast, a secondary buyer acquires the bond later from the stock exchange or other investors after the initial allotment period has concluded.
This proposed amendment to section 70(1)(x) of the Income Tax Act means that only the original subscriber who never transfers the bond will continue to enjoy complete exemption from capital gains tax upon redemption by the RBI. Harshal Bhuta, partner at P. R. Bhuta & Co. CAs, confirms that the exemption previously available to both primary and secondary buyers if held to maturity has now been withdrawn for secondary market purchasers.
Tax Implications for Secondary Market Investors
The removal of the tax-free status creates new financial considerations for investors who have purchased SGBs through secondary channels:
- Long-term capital gains (holding period exceeding 24 months) will be taxed at 12.5% with indexation benefits.
- Short-term capital gains (holding period of 24 months or less) will be taxed according to the investor's applicable income tax slab rates.
It is important to note that the 2.5% annual interest paid on SGBs remains fully taxable for all categories of bond holders under existing tax regulations, as highlighted by Singla.
Context and Market Impact
Amit Maheshwari, managing partner with AKM Global, explains the broader context behind this policy shift. The government has ceased fresh issuances of sovereign gold bonds, making the secondary market the primary avenue for acquiring these instruments. Previously, investors enjoyed capital gains tax exemption if they held the bonds until maturity, regardless of purchase channel.
However, the spectacular performance of gold prices has created potential fiscal concerns. Gold has surged over 100% in the last year and 242% over the past five years. Since SGBs are redeemed at prevailing gold prices, this relentless appreciation has significantly increased government payouts, creating what Maheshwari describes as an unhedged liability for the government.
This development represents a notable dampener for investors who have been actively purchasing sovereign gold bonds through secondary markets. They must now account for long-term capital gains tax at 12.5% and short-term gains at their respective slab rates, altering the post-tax returns calculation for a substantial segment of the investment community.
