15 Sep 2015 21:43 IST

How the new gold schemes will rein in imports

Aim to put the 20,000 tonnes of gold lying idle with Indian households to productive use

The Cabinet has cleared the decks for the launch of the gold bond and gold monetisation scheme introduced by the Finance Minister earlier this year in the Union Budget. These schemes aim to reduce the country’s gold imports and put the estimated 20,000 tonnes of gold lying idle with Indian households to productive use. India imports nearly all the gold consumed in the country. So every gram of gold purchased results in an outflow of foreign exchange.

India has spent between $29 and $57 billion a year on gold imports in the last five years. The new scheme, if successful, will help the country shrink its import bill. If even 5 per cent of the gold held by people makes its way into these deposits that will amount to a 1,000 tonnes. As India imports about 850-900 tonnes of gold in a year, an entire year’s demand could be met internally.

If you are some one who has inherited gold from your ancestors and have kept it idly in bank lockers, the monetisation scheme is good news for you. The scheme will get you returns on the yellow metal or jewellery you have without your having to sell it. This will also save you locker charges for safe-keeping the gold.

Higher interest

If you deposit your gold with the bank under this scheme, the bank will give you an interest, calculated on the value of gold. Suppose you deposit 100 grams of gold and the interest is 2 per cent per annum, you will receive 102 grams of gold after one year. The deposit will be for a minimum period of one year and, just like a fixed deposit, you can withdraw before the end of the lock-in period, if you need to.

Short-term deposits can be redeemed in cash or gold, but, long-terms deposits are likely to be redeemed only in cash. Older gold deposit schemes in existence offer 0.75 per cent to 1 per cent interest for three- to five-year deposits. But sources say the new scheme will carry a higher interest (of 1.5 to 2 per cent) to encourage people to come forward to monetise their gold.

The Government intends to on-lend this gold to jewellers and reduce the country’s import bill. The minimum deposit accepted will be 30 grams (reduced from 500 grams in the existing schemes). However, the catch here is that the gold you deposit will be melted and assayed by the bank to check for purity. Therefore, at the end of the deposit term, you will get back only gold bars and not your original piece of jewellery.

Tax exemption

Depositors will also be required to undergo ‘Know Your Customer’ (KYC) procedures. The Finance Ministry has clearly stated that this scheme is not targeted at people with unaccounted money. However, depositors will get exemption from capital gains tax and income-tax.

The sovereign gold bond scheme is even more attractive. Here, the basic objective is to offer an investment option other than physical gold to all investors. Most people opt for coins and bars when investing in the precious metal; the country imports about 300 tonnes of gold bars and coins every year.

Gold bonds

Gold bonds will be issued in denominations of 2, 5 and 10 grams by the RBI on behalf of the Centre for tenures of five to seven years. The bond will be priced at the prevailing market rate of gold. At the end of the term, the bond will be redeemed at the metal’s market price. This instrument will be tradable on commodity exchanges and allowed as collateral for loans. So, all those eyeing returns from gold can ideally buy these bonds.

The other advantage is that these bonds will also earn you a fixed coupon. The interest on the gold bonds, sources say, may be about 2-3 per cent (linked to international rate for gold borrowing) which would be calculated on the weight of gold. However, both interest and the maturity proceeds may be in rupee terms only. Returns will thus be affected by exchange rates. The maximum investment in these bonds will be capped at 500 gm per person per year. Gains will be taxed similar to physical gold.

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