Prelims: Current events of national and international importance | Economy
Why in News?
Recently, the Retrospective tax on Sovereign Gold Bonds (SGB) in the Budget 2026 shocked investors, raising fairness and policy credibility concerns.
Retrospective tax – A tax on transactions that occurred in the past by applying a new or amended tax law backwards in time.
Historical context – The retrospective tax provision was introduced in India by the Finance Act 2012.
This was later largely withdrawn in 2021 with refunds promised.
Purpose – To align taxation with current fiscal rules and remove perceived tax loopholes for secondary-market SGB gains.
Issue – Amendment to Section 70(1)(x)– Capital gains exemption will only apply to bonds subscribed at the original issue and held till maturity.
Secondary market buyers affected – Previously, both primary and secondary buyers enjoyed tax exemption if the bond was held till maturity.
Implication for investors – SGBs purchased from the secondary market will be subject to capital gains tax.
Tax rates – Long-term gains (held for more than 12 months) will be taxed at 12.5%, while short-term gains (held for less than 12 months) will be taxed at the applicable slab rate.
Effective date – Changes apply from 1 April 2026.
Issue for investors – While not legally retrospective, this change alters expectations of tax-free gains and may affect secondary market demand.
Implications – Unfair Policy – While not legally retrospective, the change breaks investor expectations of tax-free gains on SGBs purchased in secondary markets.
Investor Confidence Loss – Alters perceptions of policy predictability and may reduce investor trust.
Counterproductive Revenue – Generates very small revenue (~₹200 crore) but causes large confidence damage.
Weak Investment Climate – Could affect secondary-market liquidity and demand, though primary issuance remains unaffected.
Capital Flight Risk – May discourage some investors from participating in domestic SGB markets, indirectly affecting gold investment patterns.
