INDIA: Should you go for the new gold scheme?
New Delhi-India (May 31) The new gold scheme seems attractive, but much will depend on the interest rates offered
A key development in the gold market last week was the Centre releasing its draft paper on the proposed gold monetisation scheme. While the paper gives broad contours of how the rejigged scheme is likely to operate, it does not delve into details. As the first step to kindle enthusiasm among investors, the minimum gold one can deposit is to be reduced to 30 gm, from the current 500 gm. Also, purity testing will be done at hallmark centres within a turnaround time of three-four hours. Currently, it takes about three months for banks to test the purity of the jewellery deposited and issue a certificate to the depositor.
What’s the idea?
The purpose behind the new gold scheme is to make productive use of the estimated 20,000 tonnes of gold idling with Indian households. The gold deposited by households will be lent by banks to jewellers. It is hoped that this will curb imports, reducing the country’s requirement of foreign exchange.
Should you go for it?
The scheme looks attractive prima facie, but much will depend on the interest rates offered on the deposits. If a 3-3.5 per cent interest is offered, one can consider the scheme. If you are a gold bug, you can hold on to gold in your portfolio (though not in original jewellery form) and earn regular income on it, instead of incurring hefty locker charges. The interest is denominated in grams of gold.
Suppose you deposit 100 gm and the interest is 3 per cent per annum, you will receive 103 gm of gold after one year. The scheme also offers an option to redeem the deposit in cash. For investors, redeeming in gold form may be better. If gold prices go down, redeeming it in cash will mean an immediate loss. If redeemed as gold, at least you can hold it for some more time and realise profits.
The other advantage of this deposit scheme is that there will be no capital gains tax on the appreciation or on the interest income. So, your old gold ornaments or coins can go into this account. The jewellery that you intend to wear, however, shouldn’t be deposited as you may again have to incur making charges at 7-10 per cent. Before any gold is accepted, banks will put it through a fire assay test. The gold deposited will be converted into standard 99.5 pure gold bars to on-lend to jewellers.
What are the requirements?
The draft paper says that the depositors will have to fill up a KYC form at the test centre before they give away their gold for melting. One has to wait and watch if there are requirements to disclose the source of funds for the gold, the purchase receipt or other proof.