Retrospective Taxation on Sovereign Gold Bonds (SGBs)
The 2026 Budget proposal introduces a significant change by removing the capital gains exemption on Sovereign Gold Bonds (SGBs) that were already purchased, representing a form of retrospective taxation.
Overview of Sovereign Gold Bonds
- Introduced in 2015, SGBs are linked to the price of gold.
- Investors earn a 2.5% annual interest and receive the gold's value upon redemption.
- Bonds can be redeemed in six-monthly windows after five years or at final maturity after eight years, or sold on the stock exchange.
- Initially, any redemption by an individual was exempt from capital gains tax.
Changes in the 2026 Budget Proposal
- Restricts tax exemption to original subscribers who hold bonds until final maturity.
- Applies the change retrospectively, affecting past investments.
Legal and Policy Concerns
- The Explanatory Memorandum to the Finance Bill, 2016, stated that any redemption of SGBs by an individual is exempt from capital gains tax.
- The wording suggested that this applied to all individuals, not just original subscribers.
- There have been no known disputes or court challenges regarding this interpretation.
Comparison with Previous Instances
- Draws a parallel with the Vodafone case where retrospective taxation was applied.
- The SGB case differs as it involved no complex tax avoidance structures and was based on the clear words of the law.
Impact and Recommendations
- The practical financial gain from this change is minimal, as only a few hundred crores may be collected.
- Impacts confidence in the tax system's stability and certainty.
- Recommendation to reconsider the proposal and apply changes prospectively.
The writer highlights the importance of maintaining tax certainty and the potential negative impacts of changing tax rules retrospectively.
