The pros and cons of investing in govt’s gold monetisation schemehttps://indianexpress.com/article/business/banking-and-finance/the-pros-and-cons-of-investing-in-govts-gold-monetisation-scheme/

The pros and cons of investing in govt’s gold monetisation scheme

The Gold Monetisation Scheme can be a good way to maximise the value of idle gold lying at home. However, the key lies in evaluating its features to make an informed investment decision

Gold jewellery
Gold jewellery (Reuters photo)

Our country has long been fascinated by gold, with the yellow metal an intrinsic part of our social and economic fabric since ancient times. This fascination has resulted in Indians being among the top gold consumers in the world, with household stocks close to 25,000 tonnes.

However, this tryst with the yellow metal comes at a cost. Since we have low bullion reserves, most of our gold has to be imported. With India’s gold import bill rising, the government has attempted to reduce the import of ‘non-essential’ gold and thereby blunt the metal’s impact on trade deficits.

Aiming to tap into the country’s vast household gold reserves, the government launched the Gold Monetisation Scheme in 2015, which was a revamped version of the Gold Deposit Scheme introduced in 1999.

What is the Gold Monetisation Scheme?

The scheme’s basic premise is encouraging individuals to deposit household gold with an authorised bank for a fixed period of time. The deposited gold would be verified for weight and purity by a government-approved Collection and Testing Centre and a certificate issued against it. This can then be used to open a gold deposit account with the relevant bank and you as a depositor will receive annual interest on the bullion deposited. Upon maturity, you can withdraw your deposit in cash or kind.

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A good way to make your unutilised gold earn for you, the scheme provides assured returns and has a number of salient features:

Tenure flexibility
The scheme provides for two types of deposits – a short-term gold deposit and a medium-and-long-term government deposit. Short-term deposits have tenures from 1-3 years, with the option of broken periods (for example, a tenure of 1 year 9 months). However, the interest rate applicable is at the discretion of the bank and could change subject to other factors such as RBI rate revisions.

The medium-and-long term deposits, on the other hand, have fixed interest rates as declared by the central bank. The tenure for medium-term deposits is 5-7 years and currently pays out 2.25 per cent per annum in interest. In the case of long-term deposits, a depositor stands to receive 2.50 per cent interest annually for tenures ranging from 12-15 years.

Both these schemes allow for premature withdrawal, though they have a lock-in period (3 years for medium-term and 5 years for long-term). Interest rate penalties would be applicable on premature withdrawals.

Deposit flexibility
You can deposit your gold in any form — as coins, bars or jewellery (without gems or stonework). The minimum deposit quantity is 30 grams, with no upper limit. The low minimum limit enables more people to benefit from the scheme.

Tax benefits

Admittedly it’s one of the scheme’s biggest draws with all income earned through the gold monetisation scheme being tax-free. This means you don’t pay capital gains tax, wealth tax or income tax on it. Depending on the amount of gold deposited under the scheme, you can stand to make a tidy sum from the cumulative interest as well as the maturity amount, without having to face the long arm of the tax-man on your bullion bounty.

Returns flexibility

At maturity, you can choose to withdraw your returns as physical gold, which is disbursed in coins/bars or as liquid cash. If you’re looking to encash old gold or coins, this scheme ensures you get the market value for your bullion and earn interest from it that’s tax-free.
However, despite the attractiveness of the scheme, there are some features against it:

Deposit restrictions

While the scheme allows for any form of gold to be deposited, only standalone gold is accepted. With most jewellery containing embellishments like precious stones or alloys, this effectively disqualifies a large portion of prospective deposits.

Deposit returns

All gold deposited under the scheme becomes the property of the government, which is then melted down and added to the country’s gold reserves. As a result, your bullion deposits will not be returned in their original form upon maturity. Given the sentimental attachment to jewellery, especially heirlooms and religious ornaments, this could be a major drawback, since a large percentage of household gold is in the form of jewellery.

Furthermore, very few banks have signed on to the GMS and with most branches in urban areas, it is a potential problem for rural depositors.
While there are some challenges in the scheme, a few policy and fiscal changes could boost the popularity of such a project and contribute significantly to bolstering the country’s bullion reserves. You’d be well-advised to carefully evaluate the pros and cons before making an informed investment decision.

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The writer is CEO, Bankbazaar.com. The article has been published in collaboration with BankBazaar. Opinions expressed are that of the author.