Opinion

All you wanted to know about gold monetisation scheme

RAJALAKSHMI NIRMAL | Updated on January 24, 2018

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Gold is on a losing streak. The metal has lost 14 per cent in value in the last one year. One way to bump up the return on your gold holdings would be to give it away to the government, as and when it launches the gold monetisation scheme. The scheme is designed to make productive use of the 20,000 tonnes of gold with Indian households by on-lending it to jewellers, thus reducing the country’s gold imports and the demand for dollars.

What is it?

The government first proposed the gold monetisation scheme in this year’s Budget. A draft paper with the operational details of the scheme was released in May. And now the Centre is said to be close to launching the scheme. To participate in it, you can approach banks, which will accept deposits of gold in coin or jewellery form from individuals. As soon you approach the bank, the bank will seek your permission to melt the jewellery or coins, to assess purity. You will be informed of this value and if you deposit this gold with the bank, it will offer to pay you regular interest.

The annual interest will be calculated on the value of gold, on a marked-to-market basis. At the end of the deposit term, you can redeem the deposit in the form of bars or cash. But note that you have to choose the cash/gold redemption option at the time of opening the deposit itself. The minimum deposit accepted will be 30 grams and there will be KYC formalities to open the account.

Why is it important?

India imports nearly all of its gold requirements and, therefore, every gram of gold you acquire, results in an outflow of foreign exchange. India has expended anywhere 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 and save those precious dollars by recycling the domestically available gold.

If even 5 per cent of the gold held by people makes its way into these deposits, that will amount to a 1000 tonnes. India imports about 850-900 tonnes of gold in a year, and an entire year’s demand could be met internally. One reason for the country’s balance of payments woes in mid 2013 were the large bullion imports.

Why should I care?

Gold, unlike other investments, doesn’t pay you a regular interest or dividend. On the contrary, you incur carrying costs on it (those hefty locker charges). The monetisation scheme promises to earn you some regular interest and save you carrying costs as well.

Though banks such as SBI already offer a gold deposit scheme, they have been unpopular, with just a 1 per cent interest rate. But in the new version, experts say, the government could be offering a higher interest rate.

The interest will be denominated in terms of gold. Suppose you deposit 100 grams of gold and the interest is 3 per cent per annum, you will receive 103 gm of gold after one year. The scheme offers an option to redeem the deposit in cash, but since gold prices are in a bear market now, it makes sense to go for the option of redeeming it as gold. By doing so, the decision to sell the gold and realise the value, or to hold on, will still be with you. The other highlight of this scheme is that there will be no capital gains tax on the appreciation in the value of gold deposited, or on the interest income you make from it.

The bottomline

If the gold idling away in your bank locker can do its bit to lift the rupee, why not?

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