Government launches two gold schemes to tap household assets

20,000T – Total gold held by Indian households
1-2% – Expected interest rate on gold schemes
500gm – Maximum amount a person can invest in bonds a year

Now you can earn interest on your gold jewellery through a bank deposit scheme. You can also buy gold bonds from banks and post offices through a scheme run by the Reserve Bank of India (RBI), and earn interest on it through a separate scheme.

The cabinet on Tuesday cleared these schemes to take care of the investment demand for gold and to mobilise household gold and convert them into financial savings. Household gold holdings in India is estimated to be around 20,000 tonnes.

In the sovereign gold bond scheme, announced on Wednesday, investors can park their money in bonds which are backed by gold, instead of buying the yellow metal in physical form. The bond has more or equal advantage against the physical gold. The bonds will be issued by RBI on behalf of the government on payment of money and would be linked to gold prices.

The bonds will be issued in 2, 5 and 10 gram of gold or other denominations and the tenor of the bond could be for a minimum of 5-7 years so that it protects investors from medium-term volatility in gold prices, Arun Jaitley, finance minister, said in a news conference.

Hareesh V, research head, Geofin Comtrade, said, "It is restricted for Indian entities and the maximum allowable limit is 500 grams per person per year. The government will issue bonds with an appropriate rate of interest and which will be payable in terms of grams of gold. Banks, non-banking finance companies (NBFCs) and post offices may be authorised to transact on these bonds on behalf of the government for a fee. The bonds will be available in various denominations and the minimum tenor of the band could be around 5 to 7 years."

The gold deposit scheme is an avenue to bring out the physical gold holdings and keep it with the gold deposit account of the bank. The customer will have to give the gold to the assaying agent who will then certify the purity of the gold and it will then be given to the refiners who will melt the gold and issue a certificate in lieu the gold deposited.

The depositor will then have to take the certificate and deposit with the bank. At the time of redemption, the depositor will get the value of the gold at current market prices along with the interest (around 1-2 percent annually) earned on it. The return from these deposits is tax-free.

Industry officials said the scheme is being designed in such a manner that banks will not handle physical gold. The depositor will have to bring in a certificate from the refiner after handling over the gold jewellery.

The deposited gold will be melted and made available for jewellers as raw material so as to restrict India's increased dependence of imported gold. The gold jewellery will be melted and converted into gold bars, which will mean that the weight of the jewellery will reduce as they accept only the pure gold.

State Bank of India (SBI) already runs a gold deposit scheme since 1999 where the bank managed to mobilise only 8,500 kg of gold as the interest rate is only 1% and minimum gold that can be deposited is 500 gm.

This was catering mostly to the temple trusts and other institutional gold holdings. Of the 8,500 kg of gold the bank mobilised, it was able to deploy only 70% of the gold by lending to jewellers. Cheaper imported gold made it difficult for the bank to deploy the domestically mobilised gold with jewellers.

Industry officials said the new scheme may also face similar challenges.

Somasundaram PR, managing director, India, World Gold Council, however, said the gold monetisation scheme will drive orderly recycling and enhance transparency, benefiting millions of households and the macro economy, as it has the potential to translate gold savings into economic investments. "In addition, the sovereign gold bond scheme will allow savers to sell or trade bonds easily on commodity exchanges and key features, such as the ability to use them as collateral for loans and capital gains tax treatment similar to gold, are very thoughtful and timely," he said.