Golden Diwali

While analysts globally are writing gold’s obituary with the Federal Reserve all set to hike rates in December, there is a good opportunity for Indian gold investors to earn better returns from it. The government has introduced two initiatives — the gold monetisation scheme and the sovereign gold bond scheme. Gold monetisation aims to tap the gold lying idle in private vaults. Indian households are estimated to be sitting on 20,000 tonnes of gold. Even if 5 per cent of this is mobilised, it can feed the country’s gold demand for a year. India consumes about 850-900 tonnes of gold annually.

The bond scheme targets gold investors. Almost a third of the country’s demand for gold arises from investors who buy gold coins and bars.

Now, all these investors can consider gold bonds that will offer returns linked to the price of gold. The government will use the funds raised from the bond to replace its borrowing elsewhere, which happens at about 7.5 per cent (interest on the first tranche of gold bonds is pegged at 2.75 per cent). The notional savings made here will help the government give the promised return to bond investors.

If there is a sharp rally in gold prices, it may cost the government dear, but will be an advantage for investors.

Here’s more on what the two schemes offer.

Gold monetisation scheme (GMS) is a deposit scheme of banks where you will be paid interest on the weight of gold you give. The minimum deposit is 30 grams (of 995 fineness).

To make a deposit under this scheme, you need to first get your gold tested from one of the centres certified by BIS. These centres, gold refiners and banks will be in a tripartite agreement. After doing an XRF (x-ray fluorescence) and a fire assay test, you will be told the result. If you still wish to deposit the gold, the centre will give a purity certificate endorsing the weight and purity of gold. You have to then take the certificate to one of the designated banks. In the meantime, the banker will also get intimation from the centre of your gold deposit and he will credit your ‘gold deposit account’ with the equivalent amount of gold. The test centre will send the gold to a refiner who will keep the gold in his warehouse (unless the banks choose to hold it themselves).

This deposit scheme will be available for the short term of one to three years, medium term of five to seven years and long term of 12-15 years. While deposits of all tenures will be run only by banks, for the medium and long-term deposits, the terms and conditions and rate of interest will be fixed by the Central Government. At the end of the deposit period, your deposit, either in cash/gold (medium and long-term deposits will be redeemed only in cash) will be returned to you by the bank. If redeemed in cash, the rupee value of the gold deposit at the prevailing market price will be paid.

a. KYC - a must, but income is tax-free

The government does not intend to operate GMS like an amnesty scheme. So, like any other bank deposit, this scheme will also have a KYC requirement and you will need to provide PAN details. But don’t worry; interest income from this deposit will be exempt from tax. There will also be no capital gains tax on the appreciation in the price of gold. You also need not fear tax authorities following this trail to make you pay wealth tax as this tax stands abolished since the last Budget.

b. Will be melted, but returned as gold

Gold, be it any form, will be melted before it is accepted as deposit under GMS as the government intends to let banks on-lend this to jewellers. However, you don’t need to fret about losing your gold. You can redeem all short-term deposits in gold, by indicating this preference at the time of making the deposit. Melting and fire assay of your gold will be done in your presence and the RBI has indicated that the bank will have to issue the purity certificate to the holder in four-to-five hours unlike the current practice of a 90-day deadline for banks to do it. To enable faster processing, the government has directed more assaying centres to be opened in each State.

c. Fixed deposit, but can break it for a fee

Your gold deposit has a minimum lock-in period. Banks indicate a 12-month lock-in on short-term deposits. Post this period, withdrawal of the deposited gold is allowed by paying a fee as decided by the respective banks. The deposited gold can be used as collateral for taking a loan. Loan-to-value allowed on gold deposits by the RBI is currently 70 per cent.

d. Interest nominal, but it is on gold weight

A leading PSU bank has indicated an interest rate of 0.5 per cent for one year, 0.55 per cent for two years and 0.6 per cent for three years for the deposit under GMS. You may not be happy with this rate, but note that it is not on the rupee value of the deposit but on the weight of gold. If you let the interest accrue in the account, say, over three years or so, your gold will multiply. So, rather than keeping all your gold idle in the bank locker and coughing up steep rentals, it makes sense to give it away to GMS. You will also have the option of receiving interest payments annually, in which case the value, in rupee terms, of the interest in gold will be paid. The good news here is that for the medium- and long-term deposits, the government offers a decent interest rate — 2.25 per cent for medium term and 2.5 per cent for long term deposits.

If you own gold coins, chains or some broken jewellery to which you are not sentimentally attached, then GMS is a great idea. The making charge on chains or plain bangles is not much. So, even if at one point you want to redeem the gold deposited with the bank and convert it back to jewellery, you may not lose as much. But do not part with jewellery that is studded with stones as melting them can result in loss. Banks are unable to offer you an attractive interest rate on GMS because, internationally, gold lease rates (the rates at which jewellers borrow gold from banks) are around 3 per cent. So, this is the maximum that jewellers in the domestic market will pay the banks for their gold. But, taking into account the costs (on storing, assaying and transporting gold) for banks, the spread they have may be too narrow to give depositors of gold an interest of 2-3 per cent.

Sovereign gold bond

The government has also launched the sovereign gold bond scheme. This bond will give you capital appreciation in gold price and also earn you an interest on the value of your investment. This bond will be issued by the Reserve Bank of India on behalf of the government. The first tranche is open for subscription now. The interest offered is 2.75 per cent per annum. The minimum investment starts from as low as two grams (₹2,684*2= ₹5,368) and is for eight years. On maturity, the bond will be redeemed at the market value of gold on that date. This Dhanteras, if you intend to buy gold, these bonds are a good option. They are relatively more attractive than buying gold in the physical market or even gold ETFs. There are three reasons for this:

a. Earns you interest

While gold ETFs promise you only a gold-price linked return, these gold bonds offer an additional coupon payment. Irrespective of the direction of gold price in the period of your investment, you will get a fixed interest every year. The interest is calculated on the price at which you made the investment. Suppose, you bought bonds worth 50 grams at the gold price of ₹2,684 (the fixed price for the first tranche), the interest you will be paid annually is ₹3,690.5 (2,684*50*2.75 per cent).

b. Minimal charges

When you buy gold jewellery you end up paying for making charges. If you buy it as ETF or a gold fund, you pay for transaction charges, fund management cost, etc, that eat into returns. In the new gold bonds, however, there will be no such charge. Distribution charges, including agent’s commission, will be borne by the government. If you intend to hold these electronically, then, you may need a demat account, for which you may have to bear the cost.

c. Better liquidity

If you have bought gold as coins or jewellery, there is no option today but to go to the pawn shop to sell your gold when you are in dire need of money. But if you hold it in the form of gold bonds, you can cash-in anytime you want. Though there is a five-year lock-in-period, these bonds would be listed on the exchanges. Also, there will be an option to pledge your gold bond and borrow against it.

Gold bond is the best option in the menu of gold investments available currently. Along with returns linked to gold price, you also get an interest payment. The Finance Ministry has also indicated that investors will be given an option to extend the maturity date of the bond if gold prices are lower at the redemption date. Also, as there is a sovereign guarantee on the bonds, the risk is zero. However, this bond is treated as physical gold for taxation and capital gains will be taxed (long-term capital gains will be taxed at 20 per cent after indexation). You will also be liable to pay income tax on the interest received from the bond. Do also note that exit from these bonds before maturity may be difficult as volumes in the secondary market may be tepid in the beginning.