This was the biggest disappointment for the SGBS investors. It was expected that the government will be flexible on the taxation front; either on the interest income or on the capital gains. But the government has maintained that both the interest income and the capital gains if any would be taxable in the hands of the depositor. This would be a major negative and let us understand why?

Interest on gold bonds will be taxed at a peak rate of 33%. It straight away shaves 90 basis points from the interest and leaves a net return of just about 1.84% in the hands of the investor after considering the effect of taxation. If you also consider inflation, then this would actually be yielding negative returns to the depositors. Taxing capital gains like physical gold puts it at a major disadvantage. For example, since it is at par with physical gold, these bonds will be deemed to be short term capital gains if held for a period of 3 years and only beyond 3 years they will be treated as long term capital gains. This puts the SGBS at a major disadvantage versus other financial assets. The government could have been a little more lenient on the tax front if it was serious about pushing the scheme through in right earnest.