CA Pooja Sagar

Pooja SagarThe shares of companies like Gitanjali Gems, Titan, Rajesh Exports surged up to 12% with the news of Cabinet giving nod to gold monetization scheme and sovereign bonds. The schemes will be launched soon. The rationale behind the introduction of these schemes is the prominent fact that the stock of gold lying idle in locker of Indian households is 20,000 tonnes and around 1000 tonnes of gold is imported every year.

In 2014-15, India imported nearly $35 billion worth of gold. The schemes aim at utilizing the idle assets of the country into some productive use. The government will bring the lying idle yellow metal into the banking system giving a boost to the Indian economy.

Gold monetization scheme has provided a great opportunity for the institutions like Tirupati Balaji temple to deposit its idle lying gold and earn interest on it. This scheme will operate on the basic fundamentals of fixed deposit scheme. The households and institutions have to open a “gold saving account” with the banks and deposit their gold. The salient features of the scheme are as follows:

  1. A minimum 30gms of gold can be deposited at banks or dealers (jewelers) for an interest.
  2. The deposited gold will be melted and stored as bullion.
  3. At the time of making the deposit one has to specify its return preference in the form of cash or gold at the end of the maturity.
  4. The deposit can be made for a minimum period of 1 year to maximum 15 years.
  5. One can break the lock-in period just like FD.
  6. Both principal and interest will be valued in gold. For example if you deposit 100gms of gold and get 1% interest, on maturity will receive 101 gms.
  7. It is still unclear whether the interest income will be exempt from income tax and capital gains tax. It is believed that proposal for tax relief will be considered in next budget.

Sovereign gold bonds will give investors an option to buy a paper instrument linked to gold prices rather than the gold physically. The features of the scheme:

  1. Only resident Indians can buy these government guaranteed bonds.
  2. Scheme will have an annual cap of 500gms per person.
  3. It will be issued for 5-7 years in denomination of 5, 10, 50 and 100gms.
  4. The RBI will issue them on the behalf of government and will have sovereign guarantee.
  5. Bonds can be used as collateral for loans.
  6. Bonds to be traded on exchanges to allow early exits.
  7. Currently this scheme attracts capital gains tax. The government will extend tax benefits in the coming future.
  8. The risk of change in prices of gold will be borne by a new Gold Reserve Fund.

With the advent of the schemes, the government will be able to reduce its gold import. Some are the key benefits of the scheme:

  1. The banks will be allowed to sell the gold to jewelers. This will results in boosting domestic supply and cutting reliance on imports.
  2. The banks will be able to raise loan at a very cheaper rates from the foreign markets by using gold as collateral.
  3. The lenders can sell the gold to generate foreign currency, which can be used to lend exporters and importers.

Government has high hopes about the scheme. The schemes will benefit millions of households and the economy as it they has the potential to translate gold savings into economic investment.

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