Anumber of Sovereign Gold Bonds (SGBs) are set for premature withdrawal this month, presenting investors with a decision to make. With gold prices soaring above Rs 71,000 per 10 grams, investors are eyeing attractive returns from their SGB investments. But before opting for premature withdrawal, it’s essential to understand the tax implications and consider various factors. Here’s a detailed exploration of the premature withdrawal process and key considerations for investors.
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Premature Withdrawal:
Investors can withdraw their SGB investment prematurely once it completes the fifth year. As gold prices surge, the potential returns from premature withdrawal are enticing. However, it’s crucial to evaluate the tax implications and other factors before making a decision.
Expected Returns from SGB Investment:
Let’s take the example of Sovereign Gold Bond 2017-18 Series VIII, which was issued on November 20, 2017. This bond will be eligible for premature redemption on May 20, 2024. The premature redemption price is determined by the Reserve Bank of India (RBI) based on the average closing prices of 999 purity gold over the three days preceding the maturity date. For this particular tranche, the premature redemption price is estimated to be Rs 7,218 per gram. If an investor had initially invested Rs 1 lakh in this bond, they can expect to receive Rs 2.43 lakh upon premature withdrawal, including the half-yearly interest payouts.
Tax Implications:
According to RBI FAQs, the interest earned on SGBs is taxable under the Income-tax Act, 1961. However, capital gains tax on redemption of SGBs is exempted for individuals. The indexation benefits are available for long-term capital gains. While there’s clarity on the exemption for capital gains upon maturity, the applicability of this exemption to premature redemption is subject to debate. Tax experts suggest that premature redemption may also qualify for the exemption under Section 47(viic) of the Income-tax Act, 1961.
Considerations Before Premature Withdrawal:
Before opting for premature withdrawal, investors must consider several factors:
1. Financial Need: If there’s an immediate financial requirement, premature withdrawal may be warranted.
2. Portfolio Allocation: Gold serves as a hedge against inflation and economic uncertainty. Investors should reassess their portfolio allocation to gold and consider whether premature withdrawal aligns with their investment objectives.
3. Gold Price Trends: Monitoring gold price trends is crucial. While prices are currently high, investors must evaluate whether the upward trend is sustainable or temporary. Factors such as geopolitical tensions and economic indicators influence gold prices.
4. Alternative Investment Options: Investors should assess whether there are better investment opportunities available. Consider the potential returns, risks, and liquidity of alternative options compared to holding onto SGBs until maturity.
5. Tax Implications: Understand the tax implications of premature withdrawal. While capital gains are tax-exempt upon maturity, premature withdrawal may attract short-term or long-term capital gains tax, depending on the holding period.
6. Benefits of Maturity: Holding onto SGBs until maturity offers additional benefits. Upon maturity, investors receive the prevailing gold price along with an additional interest of 2.5% per annum on the initial investment amount.
