Executive Summary – The Gold Monetisation Scheme proposed in the Union Budget 2015-16 has been approved now and will be available for individuals to invest. Any individual can open a Gold Savings account with a minimum amount of 30 grams once the gold has passed the purity test. There are various investment tenures available and the interest is expected to be around 1.5%-3%. It is expected to be tax-free. If the scheme is implemented well and is a success, it will help the country lower the current account deficit, mobilise idle gold, provide another investment option for individuals and help the jewellery business get loans in the form of gold from banks.
How to Open the Account
The individual will have to go to an authorized"Purity Testing Centre" and get a certificate of purity for the gold he/she wishes to invest. The individual can approach any designated bank where an account will be opened provided all other details are satisfactory. The quantity of gold is credited to this account.
An individual can open a Gold Saving account with any of the authorized banks with a minimum amount of 30 gms of gold. If the individual wants to use jewellery, coins etc. for the investment, these will have to be melted into bullion in a purity testing centre after the testing is done.
The bank will decide on the interest rate to be paid to the customer. It will be payable after 30/60 days of opening of the Gold Saving Account.The interest rate is expected to be in the range 1.5% - 3% and will be given in the gold.
The tenure of the deposit will be minimum 1 year and with a roll out in multiples of one year up to more than 10 years. Breaking of lock - in period will be allowed subject to certain conditions.
The account holder will have options of redemption either in cash or gold. The option will have to be selected at the time of investment.
In the Gold Deposit Scheme (1999) , the scheme holders got exemption in capital gains tax and wealth tax. Similarly the investment will attract exemption from Wealth Tax, Capital Gains Tax and an individual can earn tax free interest.
In case of Gold ETFs, if an individual sells the Gold ETFs within 3 years of purchase, he will have to pay short term capital gains tax as per his income tax slab. If he sells them three or more years after purchase, he will have to pay 20% tax with indexation.
1. It will help to reduce the import of gold as it will mobilise the idle gold lying with citizens and bring them in circulation. If gold import is reduced, the current account deficit of the country can be lowered.
2. The scheme is another investment option for individuals. They can assess the purity of the gold that they purchased and of the gold that has been passed to them generation after generation. They can earn tax-free interest on their gold stock.
3. Individuals can get loan against the scheme they own as per RBI regulations.
4. Investors can be protected against volatility in gold prices if they have invested in the scheme.
5. Gold collected by banks for the scheme will be made available to jewellers as raw material. This will be in the form of loan. This will lead to reduced import of gold by jewellers.
Disadvantages of the scheme -
1. The Gold Deposit Scheme introduced in 1999 was not a success as expected. If people are not convinced about this scheme, it might meet the same fate.
2. Some people might not want to melt ancestral jewellery due to sentimental reasons and this will never be mobilized as all jewellery to be invested has to tested and melted.
3. There are costs associated with melting, checking purity of gold and recasting the metal when one wants to use it again.
4. Storage and transportation of gold might be a challenge in terms of cost and effort for the banks.
5. If gold price rises a lot, many people might want to redeem the investment leading to burden of repayment on the banks. Banks will have to think of options such as hedging and insurance to curb this challenge.
6. It was proposed to classify the gold deposits as reserves of banks so that they can be counted in the CRR. But this has been rejected which means, banks lose a seemingly good way to manage the CRR.
India is a big consumer of gold and there is a lot of gold lying idle with households, temples and other institutions. If all this gold can be mobilised such that terms of investment are attractive to customers, jewellery business and banks, it will help individuals, banks, government and the jewellery business. If you have a lot of idle gold in your house that can be easily melted without impacting any household member's emotions, it is a good idea to invest. The returns are not very attractive but they are tax-free. You will be protected against price volatility and do your bit to help the banks and the government. You will also know how pure the gold you purchased is.