A proposed tax tweak announced in Budget 2026 could significantly change how Sovereign Gold Bonds (SGBs) are priced and traded on stock exchanges. From April 1, 2026, the much-loved tax-free redemption benefit will apply only to investors who buy SGBs directly from the government at issuance and hold them till maturity. For those picking up SGBs later from the secondary market, capital gains at redemption will now be fully taxable.
The move has already unsettled investors and market experts, with warnings that the premium commanded by SGBs on exchanges could vanish almost overnight.
What’s changing in SGB taxation
Under existing rules, capital gains from redeeming Sovereign Gold Bonds issued by the Reserve Bank of India are exempt from tax, irrespective of how the bonds were acquired. This exemption has long made SGBs more attractive than physical gold or gold ETFs.
Budget 2026 proposes to narrow this benefit. Going forward, tax-free redemption will be available only to original subscribers—those who buy SGBs during RBI’s primary issuance and hold them continuously until maturity. If an investor buys an SGB from the stock market, or sells and later rebuys the same bond, the exemption will not apply.
The change will come into force from April 1, 2026, applicable from Assessment Year 2026–27 onwards.
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Why secondary market buyers are worried
Reacting to the proposal, Deepak Shenoy, CEO of Capitalmind, flagged the impact in blunt terms. According to him, investors who bought SGBs from exchanges specifically for tax-free maturity gains will now face full capital gains tax on redemption.
This matters because many SGBs trade at a 10–15% premium over their gold value in the secondary market. That premium largely existed due to the tax exemption at maturity. Without it, the math no longer works.
Likely impact on SGB prices
Tax experts say the market reaction could be swift. With the tax edge gone for secondary buyers, SGB prices on exchanges are expected to correct sharply, potentially as soon as the next trading session. Demand for exchange-traded SGBs may also weaken, as they start looking more like gold ETFs—but with lower liquidity.
Rajarshi Dasgupta, Executive Director–Tax at AQUILAW, noted that the government’s intent is to standardise the benefit and restrict it to long-term, original investors. The proposal, announced by Finance Minister Nirmala Sitharaman, applies uniformly across all SGB issuances.
How SGBs will be taxed now
SGBs continue to offer a fixed 2.5% annual interest, taxed under “Income from Other Sources” at the investor’s slab rate. For those selling SGBs on the exchange before maturity, tax rules remain unchanged—short-term gains are taxed as per slab rates, while long-term gains (after one year) are taxed at 12.5% without indexation for sales made after July 23, 2024.
The big shift is at maturity. Only original allottees who hold till the end of the eight-year term—or redeem early through RBI after five years—will enjoy tax-free capital gains.
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Why the government made the move
The stated objective is to curb arbitrage. Over time, investors began buying SGBs at a premium in the secondary market purely to lock in tax-free redemption gains. By limiting the exemption to original subscribers, the government aims to align the benefit with long-term participation rather than trading strategies.
The bottom line
From April 2026, Sovereign Gold Bonds will no longer be universally tax-efficient. For original subscribers, nothing changes. For secondary market buyers, the loss of tax-free redemption could mean lower prices, thinner premiums, and reduced interest in exchange-traded SGBs. Investors now need to factor tax back into the equation before chasing those shiny gold-linked returns.
