Up to 39% tax on SGB gains? Investors face tough tax trap after Budget 2026 clarifies exemption rules

SGB taxation: Investors who have enjoyed sharp gains on Sovereign Gold Bonds (SGBs) were caught off guard after Finance Minister Nirmala Sitharaman clarified changes to the capital gains tax exemption framework in the Union Budget 2026. The clarification relates to the tax treatment of SGBs purchased from the secondary market and has triggered confusion among investors amid a rally in gold prices.

Under the existing law, Section 70(1)(x) of the Income-tax Act provides an exemption from capital gains tax on income arising from the redemption of SGBs issued under the Sovereign Gold Bond Scheme, 2015. These bonds have been issued by the Reserve Bank of India (RBI) in multiple tranches over the years, with each series treated as a separate issuance.

According to tax advisory firm Tax Buddy, Sovereign Gold Bonds (SGBs) will no longer enjoy a blanket tax-free status after the Union Budget 2026, with the capital gains exemption now being tightly restricted.

From April 1, 2026, only investors who subscribed to SGBs at the time of original issuance and held them continuously until maturity will be eligible for zero capital gains tax on redemption. Investors who purchased SGBs from the secondary market or exited before maturity will lose this exemption, making such gains taxable in FY 2026–27 and onwards.

Earlier, maturity redemptions were treated as tax-free in practice even for secondary market purchases, giving SGBs a unique tax-efficient flexibility. Under the revised framework, long-term capital gains tax at 12.5% will apply where the exemption is unavailable, for example, a Rs 10 lakh gain would attract a tax of Rs 1.25 lakh, excluding surcharge and cess, potentially pushing the effective tax burden much higher.

While SGBs will continue to track gold prices, their key structural advantage has narrowed sharply, and they are now most attractive when bought at issuance and held till maturity, with secondary market premiums likely to come under pressure.

What the Finance Bill 2026 says

As per the Finance Bill 2026, however, the exemption will not apply if an investor has acquired SGBs through the secondary market. From FY 2026–27 onwards, only those investors who subscribed to SGBs at the time of original issuance and held them continuously until maturity will be eligible for capital gains tax exemption on redemption. The new provision will take effect from April 1, 2026, and apply to Tax Year 2026–27 and subsequent years.

The Budget Memorandum explains that the amendment aims to ensure uniform application of the exemption and align it with the original intent of the scheme. It proposes that the exemption be restricted to bonds subscribed at original issue and held until maturity, across all SGB series issued by the RBI.

The Income Tax Act, 2025 tightens the exemption criteria by linking it not merely to the instrument but to investor behaviour. Under the new law, the investor must be the original subscriber and must hold the bond till maturity. These conditions apply uniformly to all SGB series.

The clarification also affects premature redemptions. While earlier interpretations allowed exemption in certain five-year exit windows, such redemptions will now be taxable. Similarly, SGBs purchased in the secondary market will not qualify for exemption.

Importantly, the tax department maintains that Budget 2026 has not altered the law but merely clarified a position already communicated in a December 2022 office memorandum. According to the department, the exemption was always intended to be limited to original subscribers, and secondary market purchases were never meant to enjoy the same tax benefit.