Gold monetization

Sovereign Gold Bond scheme: aimed at customers looking to buy gold as an investment. Customers can buy gold bonds which will be relatable to the weight of gold. The bonds will be issued in various denominations for 5-7 years with a rate of interest to calculated on the value of the metal at the time of investment.

  • Max 500 gms gold equivalent bond can be purchased in a year.
  • Only offered to Indian citizen and institutions.
  • KYC norms.
  • Issued by RBI on behalf of govt. –> to be sold thru bank, post offices
  • Interest taxable as per IT Act, Physical gold rules apply to capital gains tax too
Gold Monetisation Scheme: Gold in any form can be deposited with banks for a period of one to 15 years. This gold will earn interest and redemption will be at the prevailing market value at the end of the tenure of deposit.
To bring 20,000 tonnes of idle gold lying with Indian consumers into the economy.
Marketing needed.
No tax on interest earned.
  • Emotional attachment of Indians with jewellery
  • Mostly gold held in non-jewellery form will be utilised in these schemes
  • People would not want to earn 1-2% interest because they would not be getting back in the same form as they deposited
  • The government and banks have to make special efforts to reach out to temple trusts and convince them to view their gold asset as investment holdings.
  • There is apparently a lot of idle gold in rural India, which requires special efforts to gather
  • Banks can show this gold as SLR and thus free their capital.
Recently the Union government announced details of a new gold monetization scheme. Examine what are its objectives and how does it seek to realize its objectives. (200 Words)
India is known to be one of the world’s largest importers of gold. It imports anything between 800-1000 tonne of gold every year to meet its insatiable desire for this metal. This makes the yellow metal imports one of the main components of India’s burgeoning CAD besides oil imports. Despite the presence of large gold holdings in India, at almost 20,000 tonne, it is neither traded nor monetized. Instead, individuals and institutions prefer to hoard the metal and hedge themselves against inflation and currency depreciation. It is against this background that the government recently announced the Gold Monetization Scheme (GMS) in the Union Budget (2015-16). The following are the main objective of GMS:
  1. Change the customers’ perception of gold from being a traditional savings instrument into a financial savings instrument;
  2. Reducing reliance on imported gold by mobilizing idle gold held by households and institutions. This will not only provide a fillip to the gems and jewelry sector but also help reign in CAD; In order to realize the above mentioned objectives, the government seeks to take the following steps:
    1. Income tax, wealth tax or capital gains tax will not be imposed on the interest earned by the customers on their gold savings account, thus encouraging the middle class especially to take part in this scheme. Further, given that the minimum amount of gold to be deposited with the bank is proposed to be set at 30g, even the small depositors are encouraged
    2. Allowing banks to set off their CRR and SLR requirements against the gold deposits will not only encourage banks to participate but also help free up cash reserves which can be used for lending purposes.
    3. Banks have been given various options for using the gold collected, including selling to generate foreign currency, selling coins to customers and lending to jewelers.
    4. The customer will have the option of redemption either in cash or in gold at the time of maturity, thus allowing the customer the flexibility of choice. (choice however, should be made at the time of deposition)
Despite its apparent advantages, there are certain issues regarding the GMS that remain to be answered including –
  1. Whether depositors can be questioned by the tax department on their gold holdings especially in light of the government’s drive against black money
  2. Currently the scheme is silent on the verification of ownership of the gold deposited
  3. The success of the scheme largely depends on the quick melting of the gold to be deposited, thus the government need to have in place a well-established network of melting centers.
  4. Quality checking can also be an issue. Large number of BIS quality testing centers are needed
  5. The depositor will not be able to get the gold in original form. The gold has to be melted and solidified in standard form of bricks, coins and biscuits. This will have some negative impact as jewelry has an emotional link with people. Some may be given by their parents etc. So, households may not be encouraged to deposit their jewelry.
  6. Another big hindrance will be the tax on conversion of physical gold into the gold deposit scheme. That is, if the gold was bought at Rs 1,000 per 10 gram and converted into a gold deposit scheme at Rs 25,000 per 10 gram, there will be a capital gains tax of 20 per cent with indexation.



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