By Vikash Agarwal
Budget 2015 first proposed Sovereign Gold Bond Scheme – an investment scheme where investors could buy gold in the form of Gold Bonds from Government of India. Recently, cabinet has given its approval for the same and detail norms are likely to be out in the near future.
Sovereign Gold Bond Scheme – Some of the salient features of this scheme are-
- The bonds would be denominated in grams of gold and can be bought by paying in rupees.
- The bond will have denominations of 5, 10, 50, 100 grams of gold.
- The bonds will be backed by Government of India against default
- Only resident Indians would be able to invest. NRI would not be eligible to invest.
- The bonds would be distributed/sold by banks, Post Offices, NBFCs and other
- RBI (Reserve Bank of India) would issue these bonds on behalf of Government of India.
- An individual can invest maximum of 500 grams of gold bonds in one year (approx 13 lakh at today’s price).
- KYC needs to be followed for investment above certain limit.
- The interest rate on these bonds would be decided by Government of India depending on market conditions.
- The tenor of the bonds would be 5 to 7 years. Loan would be available against these Gold Bonds. The Loan to Value would be same as applicable to Gold and determined by RBI from time to time.
- Bonds would be issued in both dematerialized and paper form. The dematerialized bonds can be traded on stock exchanges.
- The capital gains on selling on these gold bonds would be same as in case of gold.
- On maturity the redemption would be in rupee only.
- The interest would be calculated on the value of gold at the time of investment
- At maturity, the principal amount would be redeemed at the prevailing rate of gold. If the price of gold has fallen from investment to maturity, the investors can roll over the bonds for 3 or more years.
As of today you can invest in gold through any of the following products. Gold ETF is the most cost effective way to invest in gold. Similarly, gold mutual funds invests in gold ETFs and is more expensive than ETFs. Someone can also invest in gold futures on exchanges. Jeweler’s “investment schemes” are another product in which one can pay monthly installments and finally get jewelery at the time of maturity. The Sovereign Gold Bond Scheme is more efficient than all these products. Because- in case of gold ETFs and mutual funds, you pay fund manager (1 to 2 per cent every year) to manage the funds while in case of Gold Bonds you would earn interest. So we expect money from these two products to move to Gold Bonds. Sovereign Gold Bond Scheme would suit investors who invest in gold for the purpose of diversification of investment portfolio (in form of gold ETFs or mutual funds). An investor can gain in two ways – one, you can play on the price of gold and second you get interest on your deposits.
Gold Deposit Scheme
Gold Deposit Scheme was first announced by Arun Jaitely in his Budget 2015 speech. The broad idea is to encourage everyone to deposit their idle gold in banks, which in turn can be loaned to jewellers or used for other useful purpose. This would be win-win for all the participants as the depositor would be paid interest, jewellers can directly get gold loaned from banks and India can save a lot of foreign reserves which it spends in importing gold.
How Gold Deposit Scheme Works?
Depositors would first need to take their gold to the approved collection centres, which would verify the purity and take deposit of the gold. After the consent of the customer, the collection centres would send the gold to refineries to melt it. Collection centers would issue certificate for the gold deposited which would be taken to bank to open Gold Savings Account, which would be denominated in grams of gold. The refineries can store the gold on behalf of banks for mutually decided fee. There would be no charge to customers for this. Jewelers can open Gold Metal Loan Account, denominated in grams of gold with the bank and the bank would pay interest to depositors depending on duration of deposit while the jewellers would pay interest to the bank for borrowing.
Salient Features
- The minimum amount of gold that can be deposited is 30 grams
- As of now there are 331 centres where the depositors can get their gold tested
- All forms of gold including jewellery, coins and bars can be deposited
- The scheme would be available for short (1 – 3 years), medium (5 – 7 years) and long (12 – 15 years) term with different interest rates
- The above lock-in period can be broken with penalty
- Banks would fix the interest rate for short term deposits while interest on medium and long term deposit would be fixed by government like in case of PPF etc.
- The interest rate would be payable in rupees depending on deposited gold val
- The redemption on short term deposits can be in the form of cash or gold. Fractional gold value to be paid in cash only.
- The redemption on long and medium term deposits would be in form of cash only.
- The interest paid would be exempted from tax
- The deposited gold can be used anyway fit by bank like auctioning
- The gold deposited for short term can be loaned to Jewelers in physical form
(The writer is an investment consultant based in Rourkela)
