How does Gold monetization scheme work? Is it really useful?

 

Government of India has released the draft guidelines for its ambitious gold monetization scheme. Today’s headlines in the media said “Earn interest on your jewellery”. Interesting to hear this news, isn’t it? What if you could park jewellery sitting idle at home in a bank and earn interest on it? Is this as simple as it sounds? Read this article.

Ms.Goldy has over 500 grams of gold in the form of ornaments such as bangles, necklaces, earrings, etc. She keeps them in a bank safe locker and wears it as and when required. Mr.Chinnappa has told her that, instead of keeping the gold in bank locker, she can deposit them in gold monetization scheme (proposed to be launched by the government soon). By doing so, her jewellery is not only safe but also earns a reasonable interest on it. She can take back the jewellery as and when she wants (like the way she was withdrawing from her safe bank locker). Is this how scheme works?

 

No. this is not the way Gold Monetization scheme (GMS) works!

  1. Ms. Goldy has to visit the bank and show interest in GMS. Then the banker will engage ‘purity testing centres’ to certify the purity of gold. The testing centres will tell the approximate amount of pure gold.
  1. If Ms. Goldy agrees to the amount as valued by the centre, she will have to fill up a bank/KYC form and give her consent for melting the gold. (which means the jewellery will lose its form and shape)
  1. Suppose, Ms. Goldy agrees for melting the gold, the purity centre will clean the dirt, studs, meena etc from the ornaments. The studs will be handed-over to her and right in front of the customer the jewellery will be melted through a fire assay.
  1. Even at this stage, if Ms. Goldy decides to take back the gold, she can do so! (But not in the form of ornaments but in the form of gold bars) after paying a nominal fee. She may agree to deposit her gold in which case, a certificate by the collection centre certifying the amount and purity of the deposited gold will be given to her.
  1. With this certificate, Ms. Goldy should open a Gold saving account and credit the ‘quantity’ of gold into this account for a period of 1 year and renew thereafter.
  1. The bank will commit to paying an interest to the customer which will be payable after 30/60 days of opening of the Gold Savings Account. Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For example if a customer deposits 100 gms of gold and gets 1 per cent interest, then, on maturity he has a credit of 101 gms
  1. On maturity, Ms. Goldy will have the option of redemption either in cash or in gold.
  1. Ms. Goldy will get exemption from Capital Gains Tax, Wealth tax and Income Tax, etc. Basically, all increase in the value or quantity or gain from this scheme will be totally exempt from tax.

 

This is about the way this scheme works for common citizens. There are other benefits to the banks, we will discuss about it separately.

 

Now the question is, whether this scheme is useful to the citizens?

  • If the ornaments are converted into gold bars, how will it interest the citizens? If it is to be melted, they can as well sell it and keep the money in bank fixed deposits and buy gold as and when they want it.
  • Or they can also invest in Gold ETFs
  • This scheme will be a sure success if the customer gets the ornaments in its original form. If not, I have my own doubts about the success of this scheme.

 

The government is estimating around Rs.60 lakh Crores of gold in the hands of households in India. (I hope this estimate is not like black money estimate Rs.70 lakh Crores!) Even if a portion of this idle assets gets into the economy, it will be a great help to the country. Will this scheme work? We will get to know down the line.

 

FAQs on Gold Monetization Scheme

 

How much gold can be deposited in the scheme?

The minimum quantity of gold that a customer can deposit is proposed to be 30 grams. The gold can be in any form, i.e., bullion or jewellery.

 

How to check the purity of gold to be deposited in the scheme?

Customer interested in depositing the gold shall get its purity tested, which shall be done at Purity Testing Centre through a XRF machine.

If customers agree with amount of pure gold determined after the purity testing, he shall fill-up a Bank/KYC form and give his consent for melting the gold.

 

What is Purity Testing Centre?

There are 350 BIS certified Hallmarking Centres which are spread across various parts of the Country. Since these Hallmarking Centers are equipped to conduct a test of purity of jewellery in a short span of time, they shall act as ‘Purity Testing Centers’ for the scheme.

 

In which cities Gold Monetization Scheme will be launched?

Initially the scheme is proposed to be launched in selected cities only. However, if the requirement arises the scheme shall be extended to other cities. Currently, it is proposed to open 331 such centers across India.

 

How gold shall be melted?

The gold ornaments so collected from the customers shall be cleaned of its dirt, studs, meena, etc., which shall be handed-over to the customer only.

Net weight of the jewellery shall be taken after such removal. Thereafter, right in front of the customer the jewellery will be melted and through a fire assay, its purity will be ascertained.

 

How to deposit the gold?

After determining the purity of gold by fire assay, the customer can chose to refuse to deposit the gold. In that case, hecan take back the melted gold in the form of gold bars, after paying a nominal fee.

If the customer agrees to deposit the gold, he will be given a certificate by the collection centre certifying the amount and purity of the deposited gold. In this case, the melting charges shall be borne by the bank.

 

How to open the gold saving account?

When the customer produces the certificate of gold deposited at the Purity Testing Centre, the bank will open a ‘Gold Savings Account’ for the customer and credit the ‘quantity’ of gold into the customer’s account. Simultaneously, the Purity Verification Centre will also inform the bank about the deposit made

 

Is Interest payable on gold deposited in gold saving account?

Yes, banks will pay interest on ‘Gold Savings Account’ after 30/60 days of account opening. The rate of interest is proposed to be decided by banks directly. Both principal and interest to be paid to the depositor shall be valued in terms of gold.

 

How to withdraw from gold saving account?

Customer will have the option of redemption from gold saving account either in cash or in gold. Such an option will have to be exercised at the time of making the deposit. The tenure of the deposit will be minimum of 1 year and with a roll out in multiples of one year.

 

Do any capital gains arise from such transaction?

In the Gold Deposit Scheme (1999), the customers received exemption from capital gains tax. So, tax exemptions are likely to be made available for this scheme as well.

Amount earned from “Gold Saving Account” under this scheme is likely to be exempted under Income-tax Act after due examination.

 

How gold so deposited shall be used by the Banks?

The banks may be permitted to utilize the gold in the following ways:

  1. Deposit the mobilized gold as part of their CRR/SLR requirements with RBI;
  2. Sell the deposited gold to generate foreign currency;
  3. Gold can be converted in gold coins for further sale to customers;
  4. Lending to the jewellers.

 

How gold can be lent to the jewellers?

When a gold loan is sanctioned, the jewellers will receive physical delivery of gold. The banks will, in turn, make the requisite entry in the Jewellers’ Gold Loan Account. It is proposed that the interest to be charged from the jeweller shall cover the following:

  1. Interest rate paid to the depositors of gold
  2. Fee paid to the refiners and Purity Verification Centres.
  3. Profit margin of the banks

 

Thought for the day

It’s okay to lose your pride over someone you love. Don’t lose someone you love over your pride. 

 

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at [email protected]

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