All you wanted to know about the gold deposit scheme

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In India, one can't help but notice the crowd in gold jewellery stores and wonder if they are distributing this precious metal for free. Indians have a fascination for gold and it's no surprise that India is the largest importer of gold. This means our precious foreign exchange gets utilised to pay our gold imports, thereby adding to the already burgeoning current account deficit of the country. This is a cause for concern.

No wonder then that our Finance Minister is leaving no chinks in his armor to curb the imports of gold. While increasing the import duty is one way, another way is to make available the vast amount of gold holdings lying with the Indian households and even religious trusts, thereby reducing the reliance on gold imports. This is being done through the Gold Deposit Scheme.

Gold Deposit Scheme is not new and in fact was introduced way back in 1999. The objective of the government in introducing this scheme was to bring the idle gold lying in lockers into circulation and providing some tax free income to the owners as also freeing them from the hassles of storage, security and movement. This scheme did not garner much interest then and was reintroduced with some changes in the recent past. Let us first understand how the Gold Deposit Scheme or GDS works.

Under this scheme, the owner of gold can deposit his gold, which may be in any physical form, with a designated bank in exchange for an interest bearing deposit certificate of certain tenure. The tenure earlier was between 3 to 7 years but in the recent guidelines of RBI, the tenure was changed to 6 months to 7 years to provide better liquidity to the investors. Any individual, whether singly or jointly or on behalf of a minor can make an application under this scheme. Applications can also be in the name of HUF, trusts or companies. Mutual funds are also allowed to invest in GDS, as per the recent guidelines.

The minimum quantity of gold required to be tendered to apply for this scheme is 500 grams. However there is no upper limit upto which you can avail the benefits of this scheme. Once the application is made along with necessary KYC documents, the gold tendered with the bank is subject to preliminary assay or test to ascertain gold content in the jewellery by a non-destructive technique such as X-Ray/karat meter followed by a fool-proof method like fire assay. It is important to note that under this scheme, your gold will lose its original form and will be melted, tested and then minted into coins/bars.

It will indicate the weight of pure gold in the gold deposited (999 fineness). A certificate will be issued once this process is completed; however a provisional receipt is issued by the bank immediately upon receiving the deposit.

Interest to be paid is fixed by the concerned bank. For example, State Bank of India in the past had fixed interest rates for 3 years to be 0.75%, whereas for 4 years and 5 year tenures, it was 1%. Again, these percentages do not apply on the monetary value of gold deposited but as a percentage of the weight of gold deposited. For example, 1% of 500 grams would be 5 grams. This gold currency interest will be converted to rupees at a certain specific rate on the date of maturity or payout. Effectively, you get interest amount calculated in gold terms.

After expiry of the tenure opted by you, there are 3 options viz. renew the certificates or take the delivery of gold or receive the maturity amount in monetary terms at the prevalent rate of gold. Please note that when you exercise the option to receive the gold in physical form, you will be given gold bars and it would not be in the form in which you had surrendered.

There are certain benefits of the gold scheme such as -

You can earn interest on idle physical gold lying in your lockers. While you benefit from the appreciation in the price of gold in both the cases, in case of GDS you also additionally earn interest on the gold.

There is no wealth tax or income tax payable on either the gold or the income from it in case of GDS. In addition to the exemption for interest earned and wealth tax under this scheme, the deposit certificates are not treated as capital assets for the purpose of capital gains tax. Physical gold lying with you otherwise will attract wealth tax and capital gains tax on sale.

There is no hassle of storage of gold and concern about its safety.

There is no upper limit on how much gold can be deposited under the scheme. The minimum limit however is 500 grams.

You can also avail loans against security of the certificates of gold deposit in Indian Rupees from any bank.

There are also certain demerits of the scheme which require attention

Conversion of existing gold into GDS will be treated as transfer and hence subject to capital gains tax.

You lose the original jewellery design since the gold deposited is melted and converted to coins or bars. For a lot of people, this may be the biggest deterrent for investing in the scheme.

You may need to spend a lot on the making charges if you wish to convert the gold back into jewellery form.

Despite the demerits of the scheme, it can be useful for those investors who regularly invest in physical gold in the non-jewellery form. Besides benefitting from the price appreciation one can further improve the return by earning income on the idle gold. Also, in the larger picture the country can benefit if the vast amount of idle gold can be brought into circulation thereby reducing the need to import large quantities of gold.

Courtesy: Perfios Money Manager

Read more about: gold, gold deposit scheme
Story first published: Tuesday, July 2, 2013, 10:27 [IST]
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