The Government of India had announced two gold-related schemes in its last budget of 2015-16: Gold Monetisation scheme and Sovereign Gold bond scheme. Prime Minister Narendra Modi is going to formally launch the scheme on 6th Nov 2015 before the Hindu festival of Dhanteras when it is considered auspicious to purchase gold.
Through this article, I have tried to explain these two schemes.
Gold Monetisation scheme
It is a gold deposit scheme that allows an investor to deposit gold in the bank and earn interest on it. The interest is denominated in gold. For instance- If you deposit 500 gms of gold in the bank for 1 year at a 5 % rate of interest, the bank will give you a deposit certificate. You will get back 500 gms (principal) + 25 gms (interest) of gold after a year.
The minimum gold that you have to deposit through this scheme is as low as 30 grams. The gold can be deposited for one to five years. The interest earned with respect to this scheme will be exempt from both income tax and capital gains tax.
This scheme intends to mobilise the idle gold lying with the people. It has been estimated that the stock of gold in India is around 20000 tonnes.
Gold is a dead asset and this scheme envisages to turn it into a productive asset. It will enable investors to earn money on the idle gold in their possession and also to keep it in the safe-keeping of the bank. Banks may lend this gold to the jewelers.
RBI has allowed banks to keep this gold as part of their CRR/SLR requirement. This will increase the flow of money in the economy.
Gold monetisation scheme has replaced the Gold Deposit Scheme, 1999.
Sovereign gold bond scheme
This scheme has been envisaged as an alternative to buying physical gold for investment purposes. Under this scheme, Gold bonds will be issued by the Government for a period of 5 to 8 years. For instance- If you want to invest in 50 grams of gold for 5 years in the year 2015, you can buy a gold bond of 50 grams denomination for 5 years instead. You pay the price equivalent of 50 grams of gold to the Government in 2015 and get a gold bond. You will earn interest on it for 5 years. At the end of 5 years that is in 2020, you can get the bond redeemed at the prevailing market price of gold.
The interest on the bond will be decided by the Government from time to time.
The Government has capped the maximum denomination of gold bond a person can buy at 500 gms. This bond can be used as collateral for taking loans from the banks. Interest on bonds will be taxable as per the provisions of the Income Tax Act.
India imports around 1,000 tonnes of gold every year. This alternative investment option will bring down India’s import bill and hence the current account deficit.
Though there are other intricate details that will have to be considered for these schemes to be successful. To take an example: if you deposit your gold in the bank via the gold monetisation scheme, it will have to be tested and certified by the Bureau of Indian standards at the collection center. Then only you will be issued deposit certificates.
The gold will then be converted into standardised gold bars which can be easily traded.
You will start earning interest on the gold deposit from the date of conversion of gold into bars or 30 days after the receipt of gold by the bank, whichever is earlier.
To conclude, if only a small part of the idle gold in India is monetised successfully, it will be of tremendous benefit to the country. We can follow the example of Turkey. It is a country that has monetised its gold most successfully.
Update: On 30th October 2015, the Government announced that the first tranche of the sovereign gold bonds will be issued on November 26 and sold through banks and post offices. The Bond will we issued for a period of 8 years and carry an interest of 2.75 % per annum payable semi-annually. The bond will be priced on the basis of a simple average of closing prices of gold of 999 purity for the previous week (Monday-Friday) published by the Indian Bullion & jewelers Association limited.
Update: In March 2020, the Government launched the Sovereign Gold Bond Scheme 2020-21. The gold bonds will be issued in 6 tranches from 20th April to 4th September.