The government has introduced two initiatives — the gold monetisation scheme and
the sovereign gold bond scheme. Gold monetisation aims to tap the gold lying
idle in private vaults. Indian households are estimated to be sitting on 20,000
tonnes of gold. Even if 5 per cent of this is mobilised, it can feed the
country’s gold demand for a year. India consumes about 850-900 tonnes of gold
annually.
The bond scheme targets gold investors. Almost a third of the country’s demand
for gold arises from investors who buy gold coins and bars.
Now, all these investors can consider gold bonds that will offer returns linked
to the price of gold. The government will use the funds raised from the bond to
replace its borrowing elsewhere, which happens at about 7.5 per cent (interest
on the first tranche of gold bonds is pegged at 2.75 per cent). The notional
savings made here will help the government give the promised return to bond
investors.
If there is a sharp rally in gold prices, it may cost the government dear, but
will be an advantage for investors.
Here’s more on what the two schemes offer.
Gold monetisation scheme
Gold monetisation scheme (GMS) is a deposit scheme of banks where you will be
paid interest on the weight of gold you give. The minimum deposit is 30 grams
(of 995 fineness).
To make a deposit under this scheme, you need to first get your gold tested from
one of the centres certified by BIS. These centres, gold refiners and banks will
be in a tripartite agreement. After doing an XRF (x-ray fluorescence) and a fire
assay test, you will be told the result. If you still wish to deposit the gold,
the centre will give a purity certificate endorsing the weight and purity of
gold. You have to then take the certificate to one of the designated banks. In
the meantime, the banker will also get intimation from the centre of your gold
deposit and he will credit your ‘gold deposit account’ with the equivalent
amount of gold. The test centre will send the gold to a refiner who will keep
the gold in his warehouse (unless the banks choose to hold it themselves).
This deposit scheme will be available for the short term of one to three years,
medium term of five to seven years and long term of 12-15 years. While deposits
of all tenures will be run only by banks, for the medium and long-term deposits,
the terms and conditions and rate of interest will be fixed by the Central
Government. At the end of the deposit period, your deposit, either in cash/gold
(medium and long-term deposits will be redeemed only in cash) will be returned
to you by the bank. If redeemed in cash, the rupee value of the gold deposit at
the prevailing market price will be paid.
a. KYC - a must, but income is tax-free
The government does not intend to operate GMS like an amnesty scheme. So, like
any other bank deposit, this scheme will also have a KYC requirement and you
will need to provide PAN details. But don’t worry; interest income from this
deposit will be exempt from tax. There will also be no capital gains tax on the
appreciation in the price of gold. You also need not fear tax authorities
following this trail to make you pay wealth tax as this tax stands abolished
since the last Budget.
b. Will be melted, but returned as gold
Gold, be it any form, will be melted before it is accepted as deposit under GMS
as the government intends to let banks on-lend this to jewellers. However, you
don’t need to fret about losing your gold. You can redeem all short-term
deposits in gold, by indicating this preference at the time of making the
deposit. Melting and fire assay of your gold will be done in your presence and
the RBI has indicated that the bank will have to issue the purity certificate to
the holder in four-to-five hours unlike the current practice of a 90-day
deadline for banks to do it. To enable faster processing, the government has
directed more assaying centres to be opened in each State.
c. Fixed deposit, but can break it for a fee
Your gold deposit has a minimum lock-in period. Banks indicate a 12-month
lock-in on short-term deposits. Post this period, withdrawal of the deposited
gold is allowed by paying a fee as decided by the respective banks. The
deposited gold can be used as collateral for taking a loan. Loan-to-value
allowed on gold deposits by the RBI is currently 70 per cent.
d. Interest nominal, but it is on gold weight
A leading PSU bank has indicated an interest rate of 0.5 per cent for one year,
0.55 per cent for two years and 0.6 per cent for three years for the deposit
under GMS. You may not be happy with this rate, but note that it is not on the
rupee value of the deposit but on the weight of gold. If you let the interest
accrue in the account, say, over three years or so, your gold will multiply. So,
rather than keeping all your gold idle in the bank locker and coughing up steep
rentals, it makes sense to give it away to GMS. You will also have the option of
receiving interest payments annually, in which case the value, in rupee terms,
of the interest in gold will be paid. The good news here is that for the medium-
and long-term deposits, the government offers a decent interest rate — 2.25 per
cent for medium term and 2.5 per cent for long term deposits.
Our take
If you own gold coins, chains or some broken jewellery to which you are not
sentimentally attached, then GMS is a great idea. The making charge on chains or
plain bangles is not much. So, even if at one point you want to redeem the gold
deposited with the bank and convert it back to jewellery, you may not lose as
much. But do not part with jewellery that is studded with stones as melting them
can result in loss. Banks are unable to offer you an attractive interest rate on
GMS because, internationally, gold lease rates (the rates at which jewellers
borrow gold from banks) are around 3 per cent. So, this is the maximum that
jewellers in the domestic market will pay the banks for their gold. But, taking
into account the costs (on storing, assaying and transporting gold) for banks,
the spread they have may be too narrow to give depositors of gold an interest of
2-3 per cent.
Sovereign gold bond
The government has also launched the sovereign gold bond scheme.
This bond will
give you capital appreciation in gold price and also earn you an interest on the
value of your investment. This bond will be issued by the Reserve Bank of India
on behalf of the government. The first tranche is open for subscription now. The
interest offered is 2.75 per cent per annum. The minimum investment starts from
as low as two grams (₹2,684*2= ₹5,368) and is for eight years. On maturity, the
bond will be redeemed at the market value of gold on that date. This Dhanteras,
if you intend to buy gold, these bonds are a good option. They are relatively
more attractive than buying gold in the physical market or even gold ETFs. There
are three reasons for this:
a. Earns you interest
While gold ETFs promise you only a gold-price linked return, these gold bonds
offer an additional coupon payment. Irrespective of the direction of gold price
in the period of your investment, you will get a fixed interest every year. The
interest is calculated on the price at which you made the investment. Suppose,
you bought bonds worth 50 grams at the gold price of ₹2,684 (the fixed price for
the first tranche), the interest you will be paid annually is ₹3,690.5
(2,684*50*2.75 per cent).
b. Minimal charges
When you buy gold jewellery you end up paying for making charges. If you buy it
as ETF or a gold fund, you pay for transaction charges, fund management cost,
etc, that eat into returns. In the new gold bonds, however, there will be no
such charge. Distribution charges, including agent’s commission, will be borne
by the government. If you intend to hold these electronically, then, you may
need a demat account, for which you may have to bear the cost.
c. Better liquidity
If you have bought gold as coins or jewellery, there is no option today but to
go to the pawn shop to sell your gold when you are in dire need of money. But if
you hold it in the form of gold bonds, you can cash-in anytime you want. Though
there is a five-year lock-in-period, these bonds would be listed on the
exchanges. Also, there will be an option to pledge your gold bond and borrow
against it.
Our take
Gold bond is the best option in the menu of gold investments available
currently. Along with returns linked to gold price, you also get an interest
payment. The Finance Ministry has also indicated that investors will be given an
option to extend the maturity date of the bond if gold prices are lower at the
redemption date. Also, as there is a sovereign guarantee on the bonds, the risk
is zero. However, this bond is treated as physical gold for taxation and capital
gains will be taxed (long-term capital gains will be taxed at 20 per cent after
indexation). You will also be liable to pay income tax on the interest received
from the bond. Do also note that exit from these bonds before maturity may be
difficult as volumes in the secondary market may be tepid in the beginning.
(This article was published on November 8, 2015)
Source: Businessline