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Business News/ Politics / Policy/  Govt presses reset button on gold with monetization scheme
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Govt presses reset button on gold with monetization scheme

Govt plans tax incentives on gold deposits, easing of rules for banks in effort to discourage hoarding

Customers are also likely to get an income tax exemption on interest accrued on gold deposits. Photo: MintPremium
Customers are also likely to get an income tax exemption on interest accrued on gold deposits. Photo: Mint

New Delhi: The government on Tuesday took the first step towards resetting India’s mindset on gold.

It announced details of a gold monetization scheme that will encourage Indians to vest the gold in their possession with banks and earn interest on it. At present, most Indians prefer to hold gold in physical form; the country’s gold holdings are estimated at some 20,000 tonnes.

If successful, the scheme would fundamentally alter the perception of consumers towards gold and make them view it like they do any other financial savings instrument in a country where the precious metal has been traditionally hoarded at homes as a hedge against inflation and currency depreciation.

Customers will receive tax incentives on their gold deposits, like tax-free interest, while banks may be allowed to use these deposits to meet their requirements for statutory liquidity ratio (SLR) and cash reserve ratio (CRR). SLR is the proportion of deposits that banks must invest in government securities and CRR the proportion of deposits they must hold with the central bank.

Banks will also be permitted to sell the gold to generate forex reserves, which can be used by them for lending to exporters and importers. They can also trade on commodity exchanges or sell the gold to the jewellers.

The draft guidelines for the scheme are, however, silent on how the authorities will deal with gold holdings that are disproportionate to the known sources of income of a household and can be categorized as unaccounted wealth.

The scheme is innovative and should encourage people to convert their gold holdings into financial savings, said Arvind Singhal, chairman of Technopak Advisors Pvt. Ltd, a retail consultancy.

“There are a lot of gold holdings with Indians because traditionally it has been a saving mechanism. With this scheme, they will now have an option of earning some interest from their holdings even when the gold still remains in their name, though in a raw form. Also, given the tax incentives, this will be a more preferable option than going to a local jewellery shop and selling the gold," he said.

India is one of the world’s largest consumers of gold, importing as much as 800-1,000 tonnes each year, forcing the government to levy high import duties and put other restrictions on gold imports. Though stocks of gold in India are estimated to be over 20,000 tonnes, this gold is neither traded nor monetized.

Keeping this in mind, finance minister Arun Jaitley, in his budget speech in February, announced the introduction of a gold monetization scheme to replace the 1999 gold deposit scheme and gold metal loan scheme—which had failed to win traction with consumers.

As per the draft contours of the scheme, customers will have to approach a purity testing centre and get their gold, either bullion or jewellery, appraised.

“The minimum quantity of gold that a customer can bring is proposed to be set at 30g, so that even small depositors are encouraged," the draft said. This should help attract more customers as the minimum quantity in the old scheme was 500g.

The centre, which will test and accept gold, will give a certificate that mentions the value of gold to the customer. The customer can use this to open a gold savings account with a bank and get the same quantity of gold credited into his account.

Bank are free to decide their own interest rates. Both the principal and interest to be paid to the depositors of gold will be ‘valued’ in gold. “For example, if a customer deposits 100g of gold and gets 1% interest, then, on maturity he has a credit of 101g. The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself (that is, at the time of making the deposit)," the guidelines said.

Customers are also likely to get an income tax exemption on interest accrued on gold deposits.

“In the Gold Deposit Scheme (1999), the customers received exemption from Capital Gains Tax, Wealth tax and Income Tax. Similar tax exemptions are likely to be made available to the customers in the GMS (gold monetization scheme) after due examination," the note said.

The tenure of the deposit will be a minimum of one year, though there will be an option of breaking the lock-in period.

“The scheme is largely along the lines of the gold monetization scheme of 1999 and the tax benefits offered are also expected to be similar," said Rajesh Khosla, managing director of MMTC-PAMP India Pvt Ltd, a company that processes precious metals. “However, it is silent on the verification of ownership of the gold holdings," he said.

Given the government’s drive against black money, the finance ministry may need to clearly spell out whether depositors can be questioned by the tax department on their gold holdings.

“Certainly if there are very large deposits, the income tax department may step in. But the treatment by the tax department will not be very different from how it treats a gold loan scheme where the bank may only report the transaction where very huge quantities are involved," said Somasundaram P.R., managing director, India, World Gold Council.

“The government’s draft regulations have reduced the minimum quantity of gold required from 500g to 30g. This will make it a retail scheme. As it is, banks will follow the know-your-customer regulations," he said.

Jewellers can also open accounts with the banks and get a gold loan wherein they will receive physical delivery of gold from the refiners.

The new scheme will begin in a few cities first and will be expanded later. The government has sought feedback on the scheme until 2 June.

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Published: 19 May 2015, 06:04 PM IST
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