Premature redemption of SGB

A Sovereign Gold Bond runs for 8 years. That is a long commitment, so the scheme builds in an earlier exit: early encashment or redemption is allowed after the fifth year from the date of issue. Such repayment is made on the next interest payment date after the request, not immediately on demand.

A bond held in demat form can also simply be sold on the stock exchange, or transferred to another eligible investor, at any point — premature redemption to the RBI is a separate, additional route.

The tax treatment turns entirely on who is redeeming.

Individuals. Section 47 of the Income Tax Act provides that redemption of an SGB by an individual does not amount to a "transfer" at all — so no capital gains tax arises, whether the redemption happens at the 8-year maturity or as a premature redemption after year 5.

Everyone else (a trust, an HUF, a company, and so on). The Section 47 exemption does not extend to them. Capital gains on their redemption — premature or at maturity — are taxed as long-term capital gains at 12.5% if held for more than 12 months, since SGBs are listed on stock exchanges, or at slab rates if held for 12 months or less.

A sale on the exchange, as opposed to redemption to the RBI, is taxed the same way for everyone: 12.5% if held over 12 months, slab rates if not — the Section 47 exemption is specific to redemption by an individual, not to a market sale by anyone.

The workbook's own Example 6. Mr X purchased SGBs for Rs 5,00,000 and received Rs 6,00,000 on their premature redemption after year 5.

Gain                                          Rs 1,00,000
Tax, since Mr X is an individual              Nil (Section 47 — not a "transfer")

Now change only the holder. If the same Rs 1,00,000 gain had instead arisen to a trust that had held the SGB for more than 12 months, the workbook is explicit: it "shall be charged to tax at the rate of 12.50%" — a tax bill of Rs 12,500 on the identical gain, purely because the holder is a trust and not an individual.

Chapter 12 (Taxation of Other Products), section 12.2, "Sovereign Gold Bonds," and section 12.2.1, "Tax implications on SGBs," state the 5-year premature redemption window and the individual-versus-other-investor tax split, including the workbook's own Example 6. Expect a question testing whether a described redemption is tax-free (individual) or taxable (any other assessee).

• Premature redemption is available only after year 5 of the 8-year tenor, not at any point, and it settles on the next interest date, not instantly.
• The Section 47 exemption applies only to redemption by an individual — a sale on the exchange, or redemption by a non-individual, does not get this exemption.
• "Redemption" and "sale on the exchange" are taxed differently for a non-individual only in name, not in rate — both use the same 12.5%/slab-rate holding-period test, since SGBs are always listed.
• The Rs 5 lakh-to-Rs 6 lakh workbook example is for an individual specifically — do not generalise its "no tax" conclusion to a trust or company holder.