Climbing gold prices is likely the reason FM changed tax treatment of sovereign gold bonds. Only original SGB buyers will get tax exemption on maturity. Secondary SGB buyers will be taxed on capital gains. This is expected to put a big damper on the secondary SGB market.Govt-backed gold bonds haven’t been issued since Feb 2024, and gold prices have been rising. So, investors have been busy buying secondary SGBs at high premium over spot gold prices, betting that gold will keep getting pricier and will make up for the premium when bonds mature. This keeps pushing up the perceived price of gold. Once this market cools down, GOI hopes, some of the froth that’s affecting gold prices will disappear.Sovereign Gold Bonds (SGBs) have lost some of their glitter. Earlier, investors received 2.5% interest per annum and enjoyed complete exemption on capital gains at maturity. This encouraged those who wanted to take advantage of the ‘gold rush’ to buy and sell SGBs from the secondary market. Some retail investors even paid a significant premium for them.Now, the Budget has removed the capital gains exemption on SGBs purchased from the secondary market. The shift means only original subscribers who hold their SGBs to maturity can enjoy full tax exemption, while all second-hand buyers will lose it from April 1, 2026.Put simply, if you buy SGBs directly from the RBI at issuance and stay invested for the full tenure (usually eight years), your capital gains at maturity will continue to remain completely tax-free, as before. However, if you purchase SGBs from the secondary market or exit before maturity, the exemption will no longer apply, and capital gains tax will be charged as per applicable rules.In current practice, the tax-free status and short supply of govt bonds had led to a thriving secondary market and high trading. The likely impact of this move is to weaken both. Experts say it will also have an impact on price movements in the short-term trading and arbitrage opportunities in gold bonds. Already, bond prices in the market went down 5% on Sunday morning.Mumukshu Desai, a director of a financial advisory firm, said, “There was long-standing ambiguity around the taxation of SGBs, which has now been clarified. Investors who purchased SGBs from the secondary market will now face tax liability on redemption. Given the sharp appreciation in gold prices over the years, the tax outgo could be significant for those who will face the liabilities. Going forward, secondary market participation is likely to remain limited, unless investors are entering the market consciously with preparedness to bear the applicable tax liability.” Haresh Acharya, director, India Bullion and Jewellers’ Association, agreed, “The move does not impact long-term investors subscribing directly, while reducing tax efficiency for those buying SGBs from the secondary market.”Viral Mehta, West Zone head of a leading stock broking firm, said, “There are many investors who have purchased these bonds from the secondary market, where maturity proceeds were earlier exempt from tax. The sudden imposition of tax is likely to impact a significant section of such investors.”The move has brought parity in the gold opportunities in the market. The long-term capital gains tax on Gold ETF is taxable at 12.5% after 12 months of holding.Experts say that the draft amendment should have come in prospective effect. “Secondary buyers who invested in SGBs are now being charged retrospectively which is unfair,” an expert said.