New Delhi: Sovereign Gold Bonds (SGBs) have traditionally attracted investors by offering exposure to gold prices along with an annual interest payment and a capital gains tax exemption on redemption at maturity. However, a change announced in the Union Budget 2026 has altered the tax treatment for investors who purchase these bonds from the stock market.

The revised rule, effective April 1, 2026, restricts the capital gains tax exemption to individuals who subscribed to an SGB when it was originally issued and held it continuously until maturity. Investors who acquire the bonds through secondary market transactions will not qualify for this exemption, even if they retain them until the maturity date.

The distinction is important for investors considering SGBs available on stock exchanges. Although secondary market buyers continue to receive the bond’s interest payments and benefit from changes in gold prices, their capital gains on redemption are now subject to tax under the revised provisions.

How SGBs work and why investors consider them

Launched in November 2015, the Sovereign Gold Bond Scheme was introduced by the Government of India as an alternative to holding physical gold. The bonds are issued by the Reserve Bank of India (RBI) on behalf of the government and are denominated in grams of gold.

An SGB has an eight-year maturity period. Investors can also opt for premature redemption after completing five years, subject to the prescribed redemption dates. The value of the investment is linked to the price of gold, allowing holders to benefit from an increase in gold prices without having to store physical gold.

Another attraction is the fixed interest payment of 2.5% per annum on the initial investment amount. The interest is paid twice a year. Importantly, the interest is calculated on the original issue price, not the price at which a subsequent investor purchases the bond on a stock exchange.

For example, someone buying an SGB in the secondary market at a price higher or lower than its original issue price will still receive interest calculated on the original issue price. This makes it important to consider both the purchase price and the interest payment when assessing the potential return.

The RBI has not announced fresh SGB issuances in recent years, but existing bonds can still be bought and sold through the secondary market using demat and trading accounts.

What has changed in the tax rules?

Before the 2026 Budget amendment, the tax provisions provided an exemption on capital gains arising from the redemption of SGBs by individuals. The Budget has now clarified and restricted the exemption to investors who subscribed to the bonds at the time of the original issue and held them continuously until maturity.

The revised provision applies from April 1, 2026, and covers tax year 2026-27 and subsequent tax years. The Income Tax Department’s Budget 2026 FAQs explicitly state that investors who acquire SGBs through a secondary market purchase or transfer will not qualify for the redemption-related exemption.

This means that an investor who buys an SGB from another holder through a stock exchange cannot claim tax-free capital gains merely by holding the bond until its maturity date.

The change also affects original subscribers who do not hold their bonds continuously until maturity. The revised provision says that premature redemption, including through the RBI’s early redemption facility after the five-year lock-in period, will not qualify for the exemption.

The tax department’s FAQ sets out the distinction clearly:

  • Original subscriber holding the bond until maturity: Capital gains are exempt.
  • Secondary market buyer holding the bond until maturity: Capital gains are taxable.
  • Original subscriber redeeming before maturity: Capital gains are taxable.
  • Investor selling or redeeming without meeting both conditions: Capital gains are taxable.

How much tax will secondary market buyers pay?

For investors who purchase SGBs through the stock exchange, the capital gains exemption will no longer apply to redemptions covered by the revised provisions from April 1, 2026.

Long-term capital gains on such investments are generally taxed at 12.5% without indexation, while short-term capital gains are taxed at the applicable income tax slab rate, subject to the relevant holding-period and tax provisions. The actual liability depends on the investor’s purchase cost, redemption value and holding period.

It is also important to distinguish capital gains tax from the tax on interest. The 2.5% annual interest paid on SGBs remains taxable as income at the investor’s applicable income tax slab rate. The Budget 2026 change concerns the capital gains exemption on redemption; it does not make the interest payment tax-free.

Why has the government changed the exemption?

The change comes amid growing interest in buying SGBs through the secondary market. Some bonds have traded at discounts to their prevailing gold-linked value or original issue price, creating opportunities for investors to acquire them at comparatively attractive prices.

Under the earlier interpretation of the redemption exemption, secondary market buyers could potentially benefit from both the movement in gold prices and tax-free capital gains on redemption. This made certain older SGBs attractive to investors looking for a way to gain exposure to gold.

The revised rule restricts the exemption to individuals who subscribed at the original issue and remained invested until maturity. The Finance Ministry’s Budget documents describe the amendment as a measure to align the exemption with its intended scope and ensure uniform treatment across SGB issuances. Etds+1

What should investors check before buying SGBs?

Investors considering SGBs on the stock exchange should look beyond the quoted market price and the bond’s remaining maturity period. The tax treatment can make a significant difference to the final return.

Before purchasing, investors should check the original issue price, the current market price, the interest payment details and the maturity date. They should also calculate the likely capital gains tax rather than assuming that redemption at maturity will automatically be tax-free.

The distinction between an original subscriber and a secondary market buyer is now central to the tax treatment. An investor who purchases an existing bond cannot inherit the original subscriber’s exemption simply by holding it until maturity.

SGBs continue to offer exposure to gold prices and a fixed interest payment. However, the revised rules mean that the tax advantage on redemption is now reserved for investors who subscribed at the original issue and held their bonds continuously until maturity. Anyone considering a secondary market purchase should factor the applicable capital gains tax into the investment decision and consult a tax professional if unsure about their individual liability.