SGB Tax Rules Change in Budget 2026: Exemption Now Limited

Introduction to the New SGB Tax Framework

The Union Budget 2026, presented by Finance Minister Nirmala Sitharaman, has introduced a significant clarification regarding the taxation of Sovereign Gold Bonds (SGBs). Effective from April 1, 2026, the complete exemption from capital gains tax at maturity will be limited to a specific category of investors. This move aims to streamline the tax benefit and align it with the government's objective of encouraging long-term, primary investment in government securities.

The Core Change: Who Qualifies for Exemption?

Previously, any capital gains realized upon the redemption of SGBs at maturity were tax-free for all investors, regardless of whether the bonds were purchased during the initial offering or from the secondary market. The Finance Bill 2026 amends this provision to introduce stricter conditions. To qualify for the capital gains tax exemption, an investor must now meet all of the following criteria:

1. Be an individual investor.
2. Have subscribed to the SGBs during the original issuance by the Reserve Bank of India (RBI).
3. Hold the bonds continuously from the date of issue until their redemption at maturity.

This change effectively removes the tax exemption for investors who acquire SGBs through the stock exchange or any other secondary market transaction. The government's announcement clarified that this rule will apply uniformly across all SGB tranches issued by the RBI, removing any ambiguity.

Impact on Secondary Market Investors

The most significant impact of this policy shift will be felt by investors who purchase SGBs from the secondary market. These investors were often able to buy bonds at a discount and still benefit from the tax-free redemption at maturity. Under the new regime, this advantage is eliminated.

Starting from the assessment year 2026-27, any capital gains earned by secondary market buyers upon the maturity of their SGBs will be subject to taxation. The gains will be classified as either short-term or long-term capital gains, depending on the holding period, and taxed at the applicable rates. This makes secondary market SGBs less attractive from a tax perspective compared to subscribing to them directly during the primary issue.

Rationale Behind the Government's Decision

The government's intent behind this amendment is to curb arbitrage and short-term trading in SGBs. The previous blanket exemption allowed traders to profit from price differences in the secondary market and still enjoy a tax-free exit. By restricting the benefit to original, long-term investors, the policy now rewards those who align with the scheme's primary goal: providing a long-term investment alternative to physical gold and aiding the government's borrowing program. The move is seen as a way to restore fairness between primary subscribers and secondary market participants.

Old vs. New SGB Tax Rules: A Comparison

To better understand the changes, here is a summary of the tax treatment before and after the Budget 2026 proposal:

What Remains Unchanged for SGB Investors?

Despite the change in capital gains taxation, other features of SGBs remain the same. Investors will continue to receive an annual interest of 2.5% on the nominal value, which is paid semi-annually. This interest income will continue to be taxed as 'Income from Other Sources' according to the investor's applicable income tax slab. Furthermore, for original subscribers who hold their bonds until the full eight-year maturity, the redemption proceeds will remain entirely tax-free.

Broader Capital Market Reforms in Budget 2026

The adjustment to SGB taxation was part of a broader set of changes affecting capital markets announced in the budget. The Finance Minister also proposed a new tax regime for share buybacks, treating them as capital gains for all shareholders, with an additional levy on promoters to discourage tax arbitrage. Additionally, the Securities Transaction Tax (STT) on futures contracts was increased from 0.02% to 0.05%, raising transaction costs for derivatives traders. These measures collectively indicate a move towards rationalizing tax policies across various financial instruments.

Analysis and Market Outlook

Market analysts have noted that this change will fundamentally alter the investment calculation for those looking to buy SGBs from the stock exchange. Deepak Shenoy, CEO of Capitalmind, highlighted that secondary buyers who had counted on tax-free returns will now need to factor in a tax liability, diminishing one of the key advantages SGBs held over other gold-linked instruments like Gold ETFs. The new rule is expected to increase demand for primary SGB tranches when they are issued by the RBI, as the full tax benefit is now exclusively available through this route.

Conclusion

The Union Budget 2026 has drawn a clear line in the sand for Sovereign Gold Bond investors. While SGBs remain a highly tax-efficient instrument for individuals who subscribe at issuance and hold for the long term, the tax-free allure for secondary market participants has ended. As the new rule takes effect on April 1, 2026, investors must carefully consider their entry route into SGBs to align with their financial goals and tax planning strategies.