WHY BUDGET 2026’S GOLD BOND FAILS THE PRINCIPLE OF PROMISSORY ESTOPPEL AND LEGITIMATE EXPECTATIONS – NUALS Law Journal
Shreshth Nigam and Ram Sundar Singh Akela
I. INTRODUCTION
By putting his trust and capital into a state-recognised instrument, a citizen does so upon the basis of a legal promise that the conditions under which he invested will be respected during its existence. This promise is what has been threatened by the recent announcement of the Finance Minister, which has introduced the capital gains tax on the purchasers of the secondary market gold bonds on a retrospective basis until 2015.
In 2015, investors ventured into the secondary bond market in a certain legal framework that clearly exempted such proceeds from taxes on capital gains when they mature. As of February 12, 2026, there are 123736386 unit grams of bonds worth approximately 2 Lakh Crores outstanding. To impose a liability on investors now, which did not exist at the time of investment, is to punish investors, not to obey the law, though the opposite is true.
Although Parliament has the power in some cases to make legislation retrospectively, this is constitutionally viable only as a means to make clarifications, rather than being used to create new liability where none existed before. India had to experience this difference the hard way with the Vodafone and Cairn fiascos of 2012, after which retroactive clauses were finally repealed by India at a high legal and reputational cost in 2021.
This paper puts forward a three-pronged argument. The Budget 2026 amendment to tax capital gains on the premature redemption of Sovereign Gold Bonds (SGBs) by primary buyers and any redemption by secondary market buyers is constitutionally untenable for three reasons. First, it runs against the reasonable expectation of taxpayers who relied on a clear representation made in the Finance Act of 2015-16 by the State. Second, it is subject to the doctrine of promissory estoppel because the State made a specific promise – embodied in the Finance Act and the policy as well as the explanatory memorandum – upon which citizens changed their investment behaviour irrevocably. Third, the amendment destroys vested rights that had vested in the hands of investors who purchased bonds in the secondary market based on a stable legal regime. These three doctrines constitute a constitutional barrier to the use of fiscal law as a means to retrospectively amend the terms of sovereign undertakings that were crucial to securing citizen compliance in a State scheme.
II. LEGITIMATE EXPECTATION AND VESTED RIGHTS
The legitimate expectation doctrine holds a solid position in the Indian constitutional jurisprudence. In cases where the state represents something clear, unambiguous, the state does it through a legislative Act, through a policy, through its conduct, then a person can act in accordance with that representation only to find the state subsequently rescinding without providing a cogent justification. In the case of Union of India v. Hindustan Development Corporation, the Supreme Court expressly held that a legitimate expectation, though not a right to an absolute claim, establishes a claim over random state action that is enforceable. This was exactly the kind of representation made by the government when it provided a capital gains exemption on secondary market bonds, which investors depended upon when investing long-term capital in 2015.
The classical and general limitation of legitimate expectation is that it does not create a right to the perpetuation of any particular law, and no person can insist that a statute be preserved in the form that they found useful. However, the SGB scenario does not fall within this limitation because an investor is not claiming the continuation of the exemption policy; rather, he is relying on the expectation created by a sovereign instrument, which is specific, time-limited, and the parameters of which were ascertained at the time of subscription and entry in the secondary market.
The concept of vested rights further amplifies this issue. An acquired right is vested because it accrued and crystallised against an individual in the law as it is. The Supreme Court in the case of M. Rajendran v. KPK Oils, provided a definitive and authoritative observation setting out that the vested rights could not be displaced through the latter legislation unless an unambiguous intention to the same was identified by the Parliament. Investors who had the exemption invested in bonds in 2019 had already received such a vested right, which would be realised upon the maturity of the said bonds. This type of right, being taken away in a retroactive manner and not accompanied by a compensatory mechanism or a transition protection, is constitutionally invalid.
The combination of these doctrines constitutes a principle, which is that the state can alter the terms by means of which future players will play, but not alter the terms by means of which persons who have already played by them will play. To say otherwise would be to debase the legal certitude to a farce-show – and the bond market to a casino game on the will of the sovereign.
III. THE DOCTRINE OF PROMISSORY ESTOPPEL AND BUDGET 2026’S SGB AMENDMENTS
Invocation of the doctrine of promissory estoppel against the State is a classical case, if applied in the context of the Budget 2026 amendments to the Sovereign Gold Bond scheme. The doctrine, which has found a permanent place in Indian constitutional jurisprudence since Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P., is ultimately based on the principle of fairness, which provides that in case the government made a definite commitment, and a citizen adapts his/her position by relying on the commitment, the government cannot just turn its back and leave him/her in worse condition. The State can say that no estoppel can be pleaded to defame a statutory action, but the same has already been adjudged to be erroneous by the Supreme Court. The court rather observed that the doctrine is characterised as an equitable plea and had to be determined on the facts of each case, as reiterated in the case of MRF v. CST. In the case of the SGB, the facts illustrate that the doctrine should be applied.
The Representation: Both in Purpose and in Law
The government may rely on the doctrine of parliamentary sovereignty, that a statutory tax exemption can always be legislatively repealed, which is a true statement of constitutional law. The issue is that the doctrine of promissory estoppel is not about fettering the parliament’s power, but an equitable fetter on the implications of the legislation when it undermines the settled expectations. The Bombay High Court in Gharda Chemicals Ltd. v. Union of India has accepted that the legislative nature of a representation is not exempt from equitable scrutiny, specifically where the representation was an inducement, rather than a general tax regime.
According to the Explanatory Memorandum to the Finance Bill, 2016, the Government introduced the SGB scheme with the intention of decreasing demand in physical gold in order to decrease outflow of foreign exchange in case of importation of the gold and that the Gold Bond is one of the modes of substitution of physical gold. To achieve this, it expressed that it would amend Section 47 of the Income Tax Act in order to ensure that redemption of Sovereign Gold Bond under the Scheme should not be considered as a taxable transfer and, therefore, that they should not incur capital gains tax. Section 48 also underwent an amendment with the view of offering indexation benefits on long-term capital gains on transfer of Sovereign Gold Bond to all cases of assesses.
This was not a throwaway promise but the driving force of the whole plot. The government desired the citizens to veer away from physical gold, and the tax-free redemption was the carrot that it displayed to get the citizens to do so. The representation, in other words, was two-level, a promise of law incorporated in statute and a policy inducement employed by the government to promote its macroeconomic goal. A government relying on a promise of tax as a lure to modify public behaviour cannot, once it has succeeded in that behaviour, turn and revoke the promise and leave the citizen without an escape.
Prospective in Form, Retrospective in Effect
Before addressing reliance and detriment, it is important to address a technical argument that the government will certainly raise. The Explanatory Memorandum to Finance Bill, 2026 states that the amendment “shall take effect from the 1st day of April, 2026.” The government will use this to say: we are not taxing any past transaction, we are only taxing redemptions that happen after April 1, 2026 and that the law looks forward, not backwards.
To understand why this argument falls short, consider a simple example. Imagine someone who, in 2020, was promised by the government that if they deposited money into a certain account, they would not be taxed on withdrawing it after a certain time period. In 2025, the government says that, from April 1, 2026, withdrawals will be taxed. Technically, no past withdrawal has been taxed, i.e. the law is “prospective.” But the person who deposited their money in 2020 based on a specific promise cannot take the money back. Every future withdrawal, which is the only way they can ever get their money out, will now be taxed. The promise was made in the past; the consequence for relying on it falls in the future.
The amendment takes effect in its literal form, in that it is prospective, i.e., it only affects redemptions after April 1, 2026. However, it is retrospective in practical impact since it changes the legal implications of an investment decision that was made some years ago and cannot be reversed. It is too late; the reliance of the investor is something that happened in the past; the blow of the law has struck them in the future. Indian courts have always been aware of this difference, and this retrospective impact, rather than the actual date of operation, is what promissory estoppel is meant to redress.
The Reliance
In M.P. Sugar Mills Co. Ltd. v. State of U.P., the Supreme Court observed that an individual who creates his practice in response to a representation made by the government, the government is expected to respect such representation. In this case, investors did just what the government publicly requested them to do, which is to replace physical gold with SGBs. The Supreme Court in the case of Shri Bakul Oil Industries v. State of Gujarat, noted that the authority of the Government with respect to the revocation of exemption granted by it in the past is not unlimited since it cannot be used at the expense of trespassing the rule of promissory estoppel and leaving an industry without a claim to an exemption.
The buyers in the secondary market took it a step further to pay documented premiums of 15-25 per cent above the spot price of the gold, specifically due to the tax-free redemption of SGBs being more valuable than other gold instruments. That premium is not by chance, but a self-assessment of the market of the value investors placed on the promise to be tax-free. None of the investors will pay a 15-25 per cent premium on something that they would have purchased anyway. The premium is the evidence that the representation was the deciding factor in the investment.
The Detriment: An Unprecedented Lock-in
The loss incurred here is such as few have been reported elsewhere in the Indian tax jurisprudence. Even where the Supreme Court has reviewed promissory estoppel, in most instances, the investor, no matter how dissatisfied, was able to halt the practice in the future and reduce future losses. The enterprises might either be closed down or reorganised. There is no such option for SGB holders.
A secondary market buyer faces capital gains tax on exchange sale, on premature redemption, and on final maturity redemption; every door is taxed. An original subscriber who wants to exit at the premature window is now taxed on doing so. The investor is sealed inside an investment whose fundamental rules have been rewritten after the fact, with no emergency exit that does not now cost them the very tax they specifically acted to avoid.
On Supervening Public Interest
The government may invoke rising fiscal liability from surging gold prices as a supervening public interest justifying the withdrawal, as a supervening public interest as a reason for withdrawal was accepted in Kasinka Trading v. Union of India. However, as reaffirmed byM.P. Sugar Mills, if the government wants to resist the liability under promissory estoppel, it will have to affirmatively prove and disclose what the subsequent events are on account of which it claims to be exempt. The nebulae cannot be held in a black and white without any definite and explicit disclosure, and the government cannot point to a generalised fiscal emergency and present a blanket exemption. None of the Budget 2026 document contains any mention of supervening events, of a fiscal crisis, or why the tax exemption, which was fiscally manageable for a decade, has now become unviable. The government knew that the SGB was indexed to gold, and the fiscal risk of price appreciation, which could make the tax-free redemption uneconomical, was of reasonable anticipation. The risk was inherent in the design of the scheme, not a supervening event.
IV. CONCLUSION
The three arguments that the government has at its disposal and that Parliament cannot be bound by a previous Parliament, that there is no fundamental right to a tax exemption and that supervening public interest justifies withdrawal, are all, in their own way, correct. They are not wrong in this case because they are wrong in general, but because the facts of the SGB scheme place this case beyond the scope of the propositions. The SGB exemption was not a generalised tax policy whose withdrawal is within the discretion of the government of the day; it was a statutory inducement, designed to change the behaviour of the public in a certain way, which it did and which the government got the benefit of. The sovereignty argument is not applicable where Parliament was the inducer. The “no fundamental right” argument misses the point, for the claim is equitable, not constitutional. And the supervening public interest argument, on the standard of M.P. Sugar Mills, is not supported by the particularised disclosure required by the doctrine.
This analysis stipulates little space for ambiguity. The amendment via budget 2026, as it appears today, is a constitutionally infirm overreach that, in effect, weakens the very legal guarantees of a sovereign tool on which a governing document should be built. However, there is a constitutionally viable way for current policymakers to proceed. The government should give a clarificatory notification or better still it will be more convenient that the government would give out a statutory carve out through amendment in Section 70(1)(x) (Income Tax Act, 2025) clearly stating that only those investors, the primary subscribers or the secondary market buyers of the bonds who purchase the bonds on or after the date by which the amendment is made to take effect will be liable to tax as under the amended provisions. Individuals who invested their capital before that date, whether they were in the initial subscription window or in the secondary exchange, must be wholly exempt from capital gains tax on any redemption, whether at maturity or otherwise, that is premature. To give such a clarification or amendment would make the modification of the scheme really prospective both on paper and in effect, honour the promise of the State itself, and absolve the sovereign bond market of the retrospectivity of liability due to acts undertaken in the past.
Shreshth Nigam and Ram Sundar Singh Akela are both B.A. LL.B. (Hons.) students at National University of Study and Research in Law (NUSRL), Ranchi.
