Intending to mobilise gold held by households and institutions in the country, to facilitate its use for productive purposes, and to reduce the country’s reliance on gold imports, the government started the Gold Monetisation Scheme (GMS) in 2015.

In this scheme, one can deposit the gold idling at home with the bank and earn interest on it. Depositing the gold now when the yellow metal is trading at elevated levels would earn you higher income as interest is calculated on the value of gold on the date of deposit.

But remember, under the gold monetisation scheme, the gold you deposit will not be returned to you in the same form you deposited. Say, if you deposit the gold in jewellery form, you will be given back the gold in the form of gold bars or coins or the rupee value of the gold at the end of the tenure.

Here, we look at some of the key aspects of the scheme.

How does it work?

Under GMS, gold is accepted in the form of raw gold. All deposits under the scheme shall be made at the authorised collection and purity testing centres (CPTCs). In the case of large depositors, a bank branch may depute an official to accompany the customer to the CPTC.

After assaying the gold, the CPTC will issue the depositor a receipt showing the standard gold of 995 fineness on behalf of the bank. The gold deposit (say, in the form of ornaments) will be cleaned of its dirt, studs, etc and will be tested to see the quantity equivalence of 995 fineness gold. In case of ornaments, the weight in terms of equivalence of 995 fineness gold will be lower than that of the actual ornament as the latter usually has lower fineness gold.

The depositor shall produce the receipt issued by the CPTC to the bank branch, either in person or through the post.

On submission, the bank will issue the deposit certificate and the quantity of gold will be expressed in terms of grams in the gold deposit account. Interest will then start accruing to the depositor.

The rate of interest depends on the tenure opted for by the depositor.

There are three options. One, a short-term deposit with tenure of one to three years (with a facility of rollover).

The banks are free to fix the interest rates on these deposits. The interest on these deposits will be either paid in cash or in the form of gold. For instance, currently, under its revamped GMS, SBI offers interest in the range of 0.5 per cent to 0.6 per cent per annum, and this is denominated in gold. That is, for every 100 grams of gold deposited, the depositor will earn 0.5-0.6 grams of gold per annum. Union Bank of India, as per its scheme document, has been offering 0.75 per cent on gold deposits for the short-term period. As per the document, interest accrued till maturity will be paid either in cash (based on the price of gold on redemption date) or in the form of gold, at the option of the depositor.

Two, a medium-term government deposit (MTGD) can be made for five to seven years, and three, long-term government deposit (LTGD) for 12-15 years. Unlike the short-term deposits, these deposits will not be accounted for under the bank’s liabilities in its books. The deposit under this category will be accepted by the banks on behalf of the Central Government.

The rate of interest on such deposit will be decided by the Central Government and notified by the Reserve Bank of India from time to time. As per the websites of various banks, the current interest rate offered on these deposits is 2.25 per cent per annum on medium-term deposit and 2.5 per cent on long-term deposit.

The interest on medium- and long-term deposits will be paid out in cash and not gold; it will be calculated with reference to the value of gold at the time of deposit and will accrue annually (on March 31, every year).

A depositor will have an option to receive payment of interest annually or cumulatively at maturity, in which case the interest will be compounded annually.

On maturity, the depositor can redeem the principal of a deposit either in cash — amount equivalent to the value of gold, or in gold. If the former option is selected, the quantity of gold deposited will be multiplied by the gold-INR price prevailing on the maturity date. The rate is computed considering the RBI reference rate for USD-INR, Gold’s London AM Fix rate (in US$) and the prevalent customs duty for import of gold.

Where the redemption of the deposit is in gold, an administrative charge of 0.2 per cent of the value of gold on the redemption date will be collected from the depositor.

For pre-mature withdrawals, there is a minimum lock-in period of three years for medium-term deposits, and five years for long-term deposits. Any pre-mature redemption will be made only in cash (value of gold on the date of withdrawal). In the case of pre-mature withdrawals, after the minimum lock-in period, a penalty would be charged in the form of lowering the rate of interest applicable on deposits by 0.25 -0.375 percentage points.

Note that not all banks offer the GMS scheme. RBI has allowed scheduled commercial banks to offer the scheme and it is not mandatory. Certain banks such as Bank of Baroda, Union Bank of India, State Bank of India and ICICI Bank offer GMS.

Comparison with SGBs

Since the Sovereign Gold Bond Scheme (SGB) is the closest comparable investment scheme to the GMS available in the market now, we compare SGB (having a tenure of eight years) and MTGD (medium-term gold deposit) under the GMS scheme (with tenure five to seven years) for our analysis.

While the current interest rate on SGB is 2.5 per cent, banks offer 2.25 per cent on MTGD of GMS with seven years. However, interest earned on SGBs is taxable under the Income Tax Act but the interest earned on GMS is not. Thus, the post-tax returns of the GMS could be higher.

Further, while SGBs provide an exit option from the fifth year, MTGD deposits under GMS is locked-in for 3 years but withdrawal before maturity comes with a penalty. Having said that, one can sell the SGBs anytime in the secondary market even before the fifth year, but liquidity could be an issue.

Under SGBs, one can invest up to a maximum of four kg gold (minimum is one gram) in a financial year. Under GMS, the minimum deposit at a time shall be 30 grams of gold, and there is no maximum limit.

A similarity under both the schemes is that the redemption value of the investment is linked to the market value of the gold on the date of withdrawal (assuming withdrawal under GMS is in cash). Also, the initial investment is dependant on the prevailing gold rate. Further, the interest is also calculated on the rupee value of the initial investment in both the cases.

Another similarity is that the loans may be given against collateral of investment under SGB as well as gold deposits under GMS.

Our take

GMS is not for you if you are expecting the gold to be returned in the same form you deposited (especially, in case of ornaments).

If you want to hold on to gold expecting further price increase but are okay with taking back the gold in another form in the future, you can consider depositing idling gold in GMS. This would earn you some interest and save storage charges of that gold (if you are paying any).

If you think that gold prices have peaked, want to monetize your idle gold and invest it more productively, it might be a better idea to sell the gold in the market and invest the proceeds in fixed income instruments such as bank deposits that give better returns than the GMS.

Suitability

The scheme is not suitable if you are expecting the gold to be returned in the same form you deposited

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