Gold Bond Schemes - Features & Fears

As promised in Union Budget, Government has now announced Sovereign Gold Bond Scheme and Gold Monetization Scheme. The purpose is to reduce the metal's demand in physical form and to fish out idle gold, estimated 20,000 tonnes,  lying with households and other entities such as temples, trusts etc. Finance Minister told that around 1000 tonnes of gold is imported annually and people hold such quantum of idle gold just for investment purpose every year.

The positive aspects of both the schemes are that investors will not need to safeguard the physical gold and that they will earn interest on amount of gold deposited. The interest expected to be nominal between 2-3% p.a., but the government has not decided so far.

Let's look at the features of the schemes;-

Gold Monetization Scheme

1. A person or entity can earn interest in either cash or gold units, by depositing gold with the banks. However, before depositing with a bank, customer will have to get his gold ornaments melted and purity assessed from one of the recognized centers.

2. Interest payable after 30/60 days of opening the account.

3. Threshold limit for deposit - 30 grams.

4. Interest earned on it is exempt from income tax and  capital gain tax.

5. Minimum period for Gold Savings Account - One year.

Fears

According to a World Gold Council study,  gold imported in India is mainly used for wedding purposes (not investment) and a significant chunk is utilized  to make ornaments. Indian woman  does not easily part with her gold ornaments given to her by parents. She would never like to see her long-preserved, family-inherited, emotionally attached gold to be melted and lose its identity.

Gold Bond Scheme

1. Indian residents and entities are eligible to buy these bonds.

2. Bonds will be issued in 2, 5, and 10 grams of gold or other denominations.

3. An annual cap of 500 grams per person.

4. The rate of interest will be calculated on the value of gold at the time of investment. It would be floating or fixed rate.

5. Tenor of the bond - minimum 5-7 years. Investors will be given option to roll over bond for 3 years or more if gold price falls.

6.On maturity, redemption will be only in rupees. The principal amount of investment, which is denominated in grams of gold, will be redeemed on the price of gold at the time of redemption.

7. Gold Reserve Fund to take care of risk in increase of gold price. 

8. Capital gains tax will be the same as for physical gold for individual investors. This means that short-term capital gains tax will apply if bonds are sold within three years. The profits will be added to the income and taxed at income slab. Long term capital gain tax is 20% with indexation.

9. Bonds can be sold or  traded on stock exchanges as they are available in Demat form.

10.Bonds can be used as collateral for loans, like ordinary gold loan.

Fears

Indian households purchase gold coins or bars, only to be converted into ornaments at the time of marriages and not for earning profits out of it.  Since redemption of bonds will only be in rupee and not in gold, investors will have to necessarily pay capital gains tax which will be cause of great pinch to them. 

(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)

Tilak Gulati is Assistant General Manager at UCO Bank. 
Author:  www.itstrgulati.blogspot.in