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Gold Deposit Scheme and Gold Metal Loan Scheme

The Union Cabinet, chaired by Prime Minister Narendra Modi, approved on Wednesday proposals for new gold monetisation and gold bond schemes. The aim of the schemes, proposed in the 2015- 16 Budget speech, is to reduce India's gold demand and imports, putting into use the stocks with citizens.

The Gold Monetisation Scheme ( GMS) consists of a revamped Gold Deposit Scheme and Gold Metal Loan Scheme. The objective of introducing the modifications is to make the existing schemes more effective and to broaden the ambit from merely mobilising gold held by households and institutions to putting this into productive use.

Under GMS, the gold deposited by households to gold savings accounts will be put to use for auctioning, replenishment of the Reserve Bank's ( RBIs) gold reserves, coins and lending to jewellers.

The tenures of deposits can be for a short term of one to three years, amedium term of five to seven years or a longer term of 11- 15 years. For the short term, the interest rates will be decided by banks. For the other tenures, RBI, in consultation with the government, will decide. The interest income to depositors will be tax- free, as in the Gold Deposit Scheme. If the gold is loaned to jewellers, the rates will be decided by banks in consultation with RBI.

Speaking after the cabinet meeting, Finance Minister Arun Jaitley said around 1,000 tonnes of gold was imported annually and people hold much idle gold only for investment purposes. With GMS, people can deposit idle gold with authorised agencies, taking advantage of price escalation in gold and earn interest on the deposit, he said.

"The deposit tenure would be short, medium or long term and if the idle gold is deposited in the banking system, then at the time of redemption, people can get the actual value. Physical gold can be obtained if it is a short- term deposit. Besides, people will also get the interest," Jaitley said.

He and later economic affairs secretary Shaktikanta Das said the notification and date of implementation of the GMS would be announced very soon.

Pluses, issues

Das said depositors cannot benefit from appreciation in the value of gold in the existing schemes but will be doing so from any increase in the metal's value under GMS.

On the gold bond scheme, Jaitley said the interest on these would be decided keeping the market rate in view and redemptions could be done through banks, nonbank finance companies and post offices.

The scheme will have an annual cap of 500g per person and such bonds would be issued for a period of five to seven years. The bonds will be issued in two, five and 10 grammes or other denominations. The tenor could be for a minimum of five to seven years, so that it protects investors from medium- term volatility in gold prices, Jaitley said.

Issuance of Sovereign Gold Bonds will be within the governments market borrowing programme for 2015- 16 and onwards.

Issuance will be determined by RBI, in consultation with the ministry of finance. The government's borrowing programme will be adjusted accordingly, Das said.

"Since the bond will be a part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015- 16 and onwards," explained the official statement.

The gold bond scheme is estimated to help reduce the demand for physical gold by shifting part of the estimated 300 tonnes of physical bars and coins purchased every year for investment into bonds. " Since most of the demand for gold in India is met through imports, this scheme will ultimately help in maintaining the countrys current account deficit (CAD) within sustainable limits," the statement added.

The government plans to borrow ₹ 6 lakh crore in the current financial year, of which ₹ 3.6 lakh crore would be done in the first half. Rising gold imports had pushed up Indias CAD to a record high of 4.8 per cent of gross domestic product ( GDP) in 201213. In 2014- 15, it was brought down to 1.3 per cent of GDP.

Capital gains tax will be the same under the gold bond scheme as it is for physical gold for an individual investor. On the gold monetisation scheme, the official statement said the risk of gold price changes would be borne by the Gold Reserve Fund ( GRF), to be created by the government.

"Savings in the costs of borrowing, compared with the existing rate on government borrowings, will be deposited in the GRF, to take care of the risk of increase in gold price that will be borne by the government. Further, the Fund will be continuously monitored for sustainability," it said.

Other details

Das said the revenue department had agreed that amendments to the Income Tax Act for providing indexation benefits to long- term capital gains arising on transfer of bond and for exemption for capital gains arising on redemption of SGB will be considered in the next Budget ( for 2016- 17). " This will ensure that an investor is indifferent in terms of investing in these bonds and in physical gold as far as tax treatment is concerned," he said.

After announcement of the two gold schemes, share prices of jewellery entities rose. Gitanjali Gems was up 11.8 per cent, followed by Shree Ganesh Jewellery at 7.3 per cent.

This is only a green signal for the proposed schemes. There are operational challenges and detailing for most of the points touched upon, which I suppose will be addressed or discussed in the notifications that are planned to be released soon.

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