Cabinet recently approved Gold Monetization Scheme and Sovereign Gold Bonds. The prime objective behind the launch of Gold Monetization Scheme and Sovereign Gold Bond is to reduce Import of gold and reuse the gold lying idle in lockers of Indians. It is estimated that around 24,000 tonnes gold are lying into the locker or at household.
The second objective behind the launch of this scheme is to make gold productive asset. Currently, gold is a non-productive asset. Under this scheme on deposit of gold, you can earn interest. This scheme is likely to bring a lot of yellow shining metal into the banking system to give a boost to the Indian economy.
The third objective of this scheme is to provide a fillip to the gems and jewellery sector in the country by making gold available as raw material on loan from the banks.
Let’s take a look at key features of Gold Monetization scheme and Sovereign Gold Bonds.
Gold Monetization Scheme – Key Features
- Gold Monetization scheme allows investor and jewelers to deposit physical gold with banks. This scheme will also allow institutions like Tirupati Balaji Temple to deposit its idle lying gold.
- Basic fundamental of this scheme is like fixed deposit scheme. In fixed deposit scheme, you give money and earn interest while under this scheme you will give gold and earn interest. Bank will open gold deposit account for this scheme.
- 1-1.5% interest will be payable on deposited gold.
- A Minimum 30gms of gold can be deposited at the bank for an interest.
- The deposited gold will be melted and kept as a bullion.
- One has to specify maturity return preference in the form of cash or gold at the time of taking a deposit.
- If you give return preference as a gold interest will be given as a gold. For example, if you deposit 100gms of gold and get 1% interest, on maturity will receive 101 gms.
- The gold deposit can be done for minimum 1 year to maximum 15 years.
- You will be allowed to break gold deposit in between just like a fixed deposit.
- It is not clear that whether interest income will be exempted from income tax or not. No information is yet available on capital gain tax. However, it is expected that in next budget it will be considered.
How Gold Monetization Scheme function?
Gold Deposit –
Under Gold Monetization, scheme customer will bring gold in any form. Gold deposit account will be opened by banks. There will be collection center which will verify and assess the value of the gold. This center will inform the bank about value to be credited in the customer account. This gold will be converted into bar and stored in a vault at the refinery. Customer will be paid interest amount or gold as per scheme on maturity.
Gold Lending –
Any jeweller who is looking to take gold from the bank can open approach the bank and open Gold Loan account. On payment of money for gold loan bank will instruct refinery to send gold to jewellers.
Sovereign gold bonds – Key Features
- Sovereign gold bond is investment option to buy a paper bond linked to gold price. Sovereign gold bond is equivalent to Gold ETF.
- Sovereign gold bonds can be bought by only Indian residents. NRI is not allowed to purchase this bond.
- One person can purchase 500gms of sovereign gold bonds per year.
- This bond will be issued for 5-7 years and denomination will be 5, 10, 50 and 100gms.
- The RBI will issue the guarantee for the payment on behalf of the government of India.
- You will be allowed to trade this bond at the designated exchange.
- The risk of change in a price of gold will be borne by the government.
- One can use this bond for applying for loan as a security.
- Tax benefit applicable on Sovereign gold bond is yet not known. The government will probably extend tax benefit in next budget.
Benefits of Gold Monetization Scheme and Sovereign Gold Bonds
To Investor and Jeweler –
- An investor can earn money from unused idle gold. This will make gold productive asset.
- An investor can convert gold into cash using this channel.
- The jeweler will get raw material gold from bank directly (domestic supply). This will reduce cost of imports.
To Government and Economy-
- Gold import is expected to reduce. Foreign currency reserve will be saved. It will boost the economy.
- The banks will be able to raise loan using this gold as a security in the foreign market.
- This gold can be sold to generate foreign currency and it will increase foreign reserve.
This scheme will defiantly help millions of household and Indian economy. The success of this scheme will depends upon investors, however, the government has very high hope about these schemes.