Sunday, February 1, 2026

Budget 2026 Redefines Sovereign Gold Bonds: Exemption Now Exclusive to Primary Subscribers – A Paradigm Shift in Tax Arbitrage

 By Surekha Ahuja, Chartered Accountant & Tax Compliance Consultant

February 2, 2026 | Delhi

In a move that recalibrates the Sovereign Gold Bond (SGB) ecosystem, the Finance Bill 2026 (Clause 35) amends Section 47(1)(x) of the Income Tax Act, 1961, effective Assessment Year 2026-27 (April 1, 2026). What was once a blanket capital gains tax exemption on maturity redemption—for all holders, irrespective of acquisition route—is now ring-fenced for original individual subscribers from the Reserve Bank of India (RBI) who hold continuously till maturity (8 years).

This targeted amendment addresses a decade-long arbitrage: secondary market traders exploiting tax-free exits. For tax professionals advising MSMEs, family offices, and HNIs, the implications ripple across portfolio strategy, liquidity, and fiscal policy intent.

Legislative Anatomy: From Broad Exemption to Narrow Privilege

Under the pre-amendment regime:

  • Section 47(1)(x) deemed SGB maturity redemption a non-transfer, exempting capital gains entirely.

  • Secondary market buyers (BSE/NSE) holding till maturity mirrored primary gains—tax-free.

Post-amendment (per Budget Memorandum):

"The exemption shall be available only where the Sovereign Gold Bond is subscribed to by a subscriber at the time of original issue and is held continuously until redemption on maturity, for all Sovereign Gold Bonds issued by the RBI from time to time."

Key qualifiers:

  • Individual-only: Aligns with SGB Scheme 2015 eligibility.

  • Primary acquisition: Direct RBI subscription (not stock exchange).

  • Unbroken tenure: No interim transfers.

Secondary/redemption gains now trigger Section 45: STCG (<1 year, slab rates) or LTCG (>1 year, 12.5% sans indexation, per Budget 2024). The 2.5% p.a. interest remains taxable as "Income from Other Sources" (no TDS).

Economic Rationale: Curbing Arbitrage, Prioritizing Policy Goals

SGBs, launched November 2015, mobilized Rs. 72,274 crore across 67 tranches (~146.96 tonnes gold equivalent, RBI data). They substituted physical imports (saving ~$30-40 billion forex annually at peak), offered liquidity via secondary markets, and yielded 2.5% + gold appreciation.

The arbitrage flaw? Investors bought discounted secondary SGBs (trading at 5-10% premiums historically), held to maturity, and pocketed tax-free gains—often 10-15% annualized post-gold rally. This distorted:

  • Revenue leakage: Forgone LTCG ~Rs. 500-1,000 crore (back-of-envelope, assuming 20% secondary volume).

  • Market dynamics: Inflated secondary premiums, deterring primary uptake.

Government intent: Restore SGBs to their core—long-term gold monetization for CAD control. Data supports: Primary subscriptions dipped to <20% of volume in later tranches amid secondary tax plays.

Strategic Implications for Stakeholders

1. Original Subscribers (Winners)

  • No change: Tax-free maturity (e.g., Tranche I matures 2025—already exempt).

  • Advisory: Hold firm; ideal for family business succession (gold-linked inheritance, tax-efficient).

2. Secondary Holders/Flippers (Losers)

  • Maturity redemption now taxable. Exit strategy:

    Holding PeriodTax Treatment (Post-2026)Example (Rs. 10L investment, 12% gain)
    <1 yearSTCG @ slab (30% bracket)Rs. 1.2L gain → Rs. 36,000 tax
    >1 year to maturityLTCG @ 12.5%Rs. 1.2L gain → Rs. 15,000 tax
  • Actionable: Sell pre-maturity if unrealized gains align with slab; reinvest in Gold ETFs (similar tax) or RBI Floating Rate Bonds.

3. Broader Portfolio Impact

  • MSMEs/Family Offices: SGBs lose edge over physical gold (storage costs aside). Pivot to diversified gold ETFs or Sovereign Gold Coins for compliance ease.

  • International Tax Angle: NRIs lose appeal; DTAA credits limited for LTCG.

  • Peer Review Note: Auditors flag secondary SGBs in FY 2025-26 disclosures—reclassify as taxable assets.

Quantitative Edge Lost: Historical SGB returns (gold + 2.5%) averaged 11.5% CAGR (2015-2025). Post-tax for secondary: Nets ~9-10%, parity with ETFs.

Policy Critique: Prudent, Yet Liquidity Risks

Commendable for revenue discipline (projected Rs. 2-3 lakh crore collections, per grapevine), but secondary markets may thin—trading volumes (~Rs. 500 crore/month) could halve, hiking bid-ask spreads. Uniformity via taxation? Partial; primary bias favors institutions over retail.

Recommendation to policymakers: Grandfather existing secondary holdings or introduce partial indexation for long-haul flips.

Forward Path for Advisors and Investors

  1. Audit/Compliance: Update client ledgers; disclose secondary SGB intents in ITR-2/3.

  2. Portfolio Rebalance: Target upcoming RBI tranches (likely Q1 2026); blend with G-Secs for yield stability.

  3. Blog Takeaway: SGBs endure as sovereign havens—but for purists only. Track MCA/RBI notifications for tranche alerts.

In fiscal chess, Budget 2026 checks tax evasion without killing the golden pawn. 

Sovereign Gold Bond Taxation Snapshot (Post-Budget 2026)

Investor TypeAcquisition RouteHoldingTax Treatment
Original individual subscriberRBI (Primary)Till maturityCapital gains exempt
Secondary market buyerBSE / NSETill maturityLTCG @ 12.5%
Any investorAny< 1 yearSTCG @ slab
Any investorAny> 1 year (pre-maturity sale)LTCG @ 12.5%
All investorsAnyAnnual interest (2.5%)Taxable at slab rates

Key Change: Exemption under Section 47(1)(x) now applies only to original RBI subscribers holding continuously till maturity.