Overview: what creates the difference
Sovereign Gold Bonds (SGBs) have a unique tax benefit that applies only in a specific situation. When an SGB is redeemed with the Reserve Bank of India (RBI), the Income Tax Act provides a capital gains exemption for individual investors. The same redemption, when the bonds are held in the name of a Hindu Undivided Family (HUF), does not enjoy that exemption. As a result, long-term capital gains tax can apply to the HUF even though the redemption route is identical.
This difference typically becomes visible during the early redemption window (after five years) or on maturity, especially when gold prices have risen sharply and the capital gain is significant.
The legal principle: capital gains arise only on “transfer”
Capital gains are taxable only when there is a “transfer” of a capital asset under the Income Tax Act. In the case of SGBs, the law includes a specific carve-out: redemption of SGBs with the RBI by an individual is treated as not being a transfer for capital gains purposes. If there is no transfer, there is no capital gains computation, and therefore no capital gains tax.
This exemption applies whether the redemption is on the original maturity date (eight years) or through the permitted premature redemption route (after five years, on the interest payment dates), as long as the redemption is carried out with the RBI through the prescribed mechanism.
Why HUFs are treated differently
An HUF is a separate taxable person under the Income Tax Act. The SGB exemption on redemption is drafted specifically for individuals. It does not extend to other categories of taxpayers, including HUFs, firms, companies, LLPs, trusts, or other entities.
Therefore, when an SGB is held in the name of an HUF and redeemed with the RBI, the redemption is not covered by the individual-only exemption. The redemption is treated as a transfer, and the gain is taxed under the normal capital gains provisions.
In practical terms, this means the difference is not driven by the bond, the holding period, or the redemption route. It is driven by the holder’s tax status.
What is taxable for an HUF on redemption
For an HUF, the tax is generally computed as long-term capital gains when the holding period conditions for long-term classification are met. Based on the current framework referred to in the query, the applicable tax rate is 12.5% on long-term capital gains (subject to the specific provisions in force for that year and the nature of the asset). The gain is typically calculated as the difference between the redemption price and the issue price.
In contrast, an individual redeeming the same SGB with the RBI does not compute capital gains at all for this redemption, because the event itself is not treated as a transfer.
Important distinction: RBI redemption vs selling on an exchange
The exemption discussed above is tied specifically to redemption with the RBI. If an individual sells the SGB in the secondary market (for example, on a stock exchange) instead of redeeming it with the RBI, the transaction is a normal transfer and capital gains tax can apply even for an individual. The special exemption is not a blanket exemption for all exits; it is exit-mode specific.
What remains taxable even for individuals
It is also important to separate capital gains treatment from the interest component. SGBs carry a fixed interest component (currently 2.5% per annum on the initial investment amount, paid semi-annually). This interest is typically taxable as “Income from Other Sources” for both individuals and HUFs, irrespective of whether the redemption proceeds are exempt or taxable.
Practical steps and documentation to keep ready
If you hold SGBs in both individual and HUF names, it helps to plan and document the exit properly:
Maintain the original issue price and allotment details (including online discount, if any).
Download the RBI redemption price notification for the relevant redemption date.
For HUF holdings, compute the gain using issue price versus redemption price and evaluate the tax outgo.
Ensure the interest component is tracked separately for reporting purposes.
Match credits and tax entries with Form 26AS/AIS where relevant, and keep bank statements and holding statements handy.
Key takeaway
The tax advantage on SGB redemption is not a “gold” exemption. It is a narrowly framed exemption that applies to individuals redeeming with the RBI. HUF-held SGBs do not fall within that carve-out, so the same redemption can attract long-term capital gains tax at 12.5% for the HUF. For investors who use both individual and HUF structures, the holding entity becomes a decisive factor in the post-tax return from SGBs.