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Saturday, April 20, 2013

What are Gold Deposit Schemes

What are Gold Deposit Schemes
The Gold Deposit Schemes is not a very popular option but can be a very prudent choice in the Indian context as we still continue to keep immense deposits of gold in our bank lockers. As the name suggests, this scheme essentially allows the owner of gold jewellery to deposit the gold with the bank and earn a safe interest on the same.
Gold deposits schemes in India offers excellent tax effective opportunity for investor who is looking for long-term coverage from gold and getting tax benefits too.

How did it start?
As per the estimates of an RBI committee, about 20,000 tonnes of idle gold is lying with the people. The central bank wants to channelize the idle gold for productive purposes and also check the demand for imports. Gold deposit scheme was launched in 1999 by the Government of India to save valuable foreign exchange by using the gold property stored in households and many religious trusts. Government of India also issued guidelines for individuals how to investment in gold in India. Rising gold imports have been a major concern for the government as it contributes substantially to the widening Current Account Deficit (CAD).

Who can invest?
Any individual can take benefits of gold schemes in India either applying for gold deposit scheme singly, or jointly, or even on behalf of a minor. The application also can be made in the name of HUF, charitable trusts, religious trusts and companies. In case of individual depositor, the benefit of nomination is attached under gold deposit scheme India. However the nomination facilities are not available HUF, trusts or companies.
Off late, SEBI registered mutual funds and exchange traded funds may also deposit under the scheme.

How much can one invest?
There is no cap on investment. The investor can place a minimum of 200 gm of gold with the bank in exchange for gold bonds which carry a tariff-free interest rate of 3% - 4%, depending upon the period.

What are the lock in periods?
The lock-in period ranges between 3 and 7 years. Seeking to unfreeze idle gold, the Reserve Bank of India recently made the Gold Deposit Schemes of banks more attractive by lowering the investment time period to as low as 6 months. Of course, the interest rate is higher for a higher lock in period.

What are the Tax Benefits?
The gold bonds are not subject to capital gains tax and wealth tax. The interest earned on the deposit is exempt from income tax and the value of the gold offered is exempt from wealth tax. The bonds will be redeemed in cash or gold – the choice is left to the investor.

What are other Benefits?
1) Gold deposit scheme India enables earning from gold.
2) It also helps to save insurance or bank locker cost.
3) Gold deposit schemes in India also gives opportunity to gain from price appreciation according to current gold price in Indian bank.
4) The scheme also offers a direct benefit in the form of interest which you earn on the value of your gold. The interest earned from this certificate is exempt from income tax.
5) An individual can also get loans in rupees against security of the certificates of gold deposit from bank.

How does it work?
Under gold schemes in India the gold owner gets a certificate against the deposited gold from the authorized banks. One can keep gold in the form of gold coins, gold bars, coins and jewellery. Gold biscuit rate gets higher interest rate than the gold coins in banks. Although the minimum denomination of the certificate is 500 grams, India’s largest bank State Bank of India offers minimum denomination of 200 gms.

Gold investment in bank is very easy and transparent process. The investor needs to provide proof of identity and address, as well as a photograph, along with the application form for opening the account, nomination form in case of individuals, ECS form for credit of interest directly in the bank account, and an inventory form, giving description of the gold deposited. The bank will issue a provisional receipt against accepting the gold. The bank will test the purity of gold which need to be deposited The gold deposited is then melted to determine the content of pure gold with uniform fineness and is converted into bars. Subsequently, a gold deposit certificate is issued for the weight.

Demerits and Precautions
1) Since there is a lock in period involved, you cannot buy and sell gold like you can do it in an ETF. ETFs definitely offers more liquidity vis a vis Gold deposit schemes.
2) If the price of the gold goes down at the time of maturity, you have no choice but to take it or may be , reinvest.
3) If you opt to go for Gold Deposit schemes, make sure that you opt for nationalized banks rather than a local "trusted" jeweler near your house.
4) You lose the original jewellery design (and the making charges) since the gold is melted for valuation.
5) If you want to recreate the jewellery, you will have to spend again on the making charges (which can be pretty hefty)

From a pure financial angle, Gold Deposit Schemes are better than keeping the gold locked in a bank locker, but ETFs are much better and more liquid. The most important aspect in the Indian context, however, is the emotional attachment to the jewellery that our families have. A prudent decision would be to strike a balance between the family's emotions and financial prudence.


Manoj Arora

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