Govt approves Gold Bond, Gold Monetisation schemes

Holding out a promise of tax exemption, government today cleared a scheme aimed at tapping part of an estimated 20,000 tonnes of idle gold worth about Rs 5,40,000 crore into the banking system and issuing sovereign bonds as an alternative to the precious metal.

Through the Gold Monetisation Scheme, approved by the Union Cabinet, gold in any form can be deposited with banks for a period of one to 15 years that will earn interest while redemption will be at the prevailing value at the end of the tenure.

Sovereign gold bonds, on the other hand, are aimed at people buying the precious metal as an investment. Such bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment.

However, there will be a cap of 500 grams that a person can purchase in a year. Such bonds will be offered to only Indian citizens and institution while the securities will be traded on exchanges to allow early exit for investors.

"It is safer and economically more stable to go under both these schemes," Finance Minister Arun Jaitley said while briefing reporters about that decision of the cabinet, which is a follow-up of an announcement made by him in the Budget for 2015-16.
Economic Affairs Secretary Shaktikanta Das later said that under the Gold Bond Scheme, the government plans to exempt capital gains that will be made at the time of redemption.

"These schemes will be launched very soon," he said, adding that they were different from earlier schemes in the sense that deposits will be denominated in gold instead of money.

As regards monetisation scheme, banks will be allowed to sell the gold, deposited with them, to jewellers to boost domestic supply and cut reliance on imports.

But there will be no dilution in Know-Your-Customer (KYC) norms and gold depositors will have to make full disclosures on the source of the precious metal, he said. "We do not want to allow Gold Monetisation Scheme to become a vehicle for converting black money into white."

The gold monetisation scheme provides for incentives to the banks, while individuals and institutions can deposit as low as 30 gm of gold, while enjoy the same tax treatment as was accorded to Gold Deposit Scheme of 1999. 

The government, in consultation with the RBI, would decide on the interest rate for both the Gold Bond and Gold Monetisation schemes.

The rate would vary from one tranche to another.

"This rate of interest will be calculated on the value of the gold at the time of investment. It could be a floating or a fixed rate," an official statement said.

The Sovereign Gold Bonds would be issued to Indian residents on payment of rupees and denominated in grams of gold.

The bonds, which would be available both in demat and paper form, would have sovereign guarantee.

The principal amount of investment, which is denominated in grams of gold, would be redeemed at the price of gold at that time.

"If the price of gold has fallen from the time that the investment was made, or for any other reason, the depositor will be given an option to roll over the bond for three or more years," the statement added.

It would also create a Gold Reserve Fund which would bear the risk of gold price fluctuations. The Fund would also be continuously monitored for sustainability.

The Gold Bond scheme will help in reducing the demand for physical gold by shifting part of the estimated 300 tonnes of physical bars and coins purchased every year for investment into bonds, the statement said.

"Upside gain and downside risks will be with the investor and the investor will need to be aware of the volatility in gold prices," it added.

The Bonds would be easily sold and traded on exchanges to allow early exits for investors who may so desire and KYC norms will be similar as that of gold.

Das said that under the scheme, indexation benefits on long term capital gains will be available on transfer of gold bonds.

As regards the Gold Monetisation scheme, it is basically a revamped version of Gold Deposit Scheme (GDS) and the Gold Metal Loan (GML) scheme, the statement said.
 
India imports about 1,000 tonnes of gold every year and it has an adverse impact on the current account deficit.

Besides, 30 per cent of the gold imported is utilised towards household savings.
Through the Gold Monetisation scheme, government expects that the country's reliance on import of gold to meet domestic demand would be reduced.

It would also benefit the gems and jewellery sector which is a major contributor to the country's exports.

The mobilised gold will also supplement RBI's gold reserves and will help in reducing the government's borrowing cost, the statement said.

"The risk of gold price changes will be borne by the Gold Reserve Fund that is being created. The benefit to government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund," it said.

The scheme will help in mobilising the large amount of gold lying as an idle asset with households, trusts and various institutions in India and will provide a fillip to the gems and jewellery sector.

Geofin Comtrade Research Head Hareesh V said: "The return from deposits in gold monetisation scheme is totally tax free. The deposited gold will be melted and made available for jewelers as raw material so as to restrict the increased dependence of imported gold".

The two schemes would have twin benefits, Das said, adding that the idle gold would be put to productive use and the excessive demand for physical gold would be checked.

The deposits made under the Gold Monetisation scheme can be made for a short-term period of 1-3 years, a medium-term period of 5-7 years and a long-term period, of 12-15 years (as decided from time to time).