In order to curb the demand for physical gold and curtail excessive dependence on gold imports, the Union Cabinet headed by Prime Minister Narendra Modi has given its go ahead to two gold savings schemes – Gold Monetization Scheme (GMS) and Sovereign Gold Bond Scheme (SGBS).
GMS: GMS will enable households and jewelers to keep their gold with the banks and earn interest on it. The Finance Ministry intends to replace the Gold Saving Scheme with the GMS.
The deposits under the this scheme can be made for a short-term period of 1-3 years (with a roll out in multiples of one year); a medium-term period of 5-7 years and a long-term period, of 12-15 years (as decided from time to time). Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including part withdrawal).
The amount of interest rate payable for deposits made for the short-term period would be decided by banks on basis of prevailing international lease rates, other costs, market conditions etc. and will be denominated in grams of gold. For the medium and long-term deposits, the rate of interest (and fees to be paid to the bank for their services) will be decided by the government, in consultation with the RBI from time to time. The interest rate for the medium and long-term deposits will be denominated and payable in rupees, based on the value of gold deposited.
SGBS: Only Indian residents can buy these bonds. SGBS will be issued in denominations of 2,5,10 grams of gold. Also, an individual cannot buy more than 500 grams of gold bonds per year. This translates to a maximum investment of Rs.13.32 lakh a year at today’s cost (Price of 10gm of gold is Rs.26,635 as on June 23, 2015).
SGBS will have a maturity period 5-7 years. The government has proposed that the yield on these bonds be linked to the international rate for gold borrowing. An indicative lower limit on such borrowing rates is 2% per annum. That means, investors will get an indicative return of 2% per annum along with the mark-to-market loss or gain.
Like physical gold, investors can use these bonds as collateral for loans. In order to provide liquidity, the government has proposed to list these bonds on commodity exchange platforms.
SGBS will be treated as physical gold for taxation. That means, if an investor sells these bonds through an exchange within 3 years, the gains, if any, will be taxed at marginal rate of taxation. Similarly, long term capital gains arising out of sale of bonds after 3 years will be taxed at 10% or 20% with indexation.
RBI will sell these bonds through banks, post offices, NBFCs and brokers/agents. IFAs can sell these bonds. Distributors will get 0.5% as commission to sell this scheme.
Government intends to issue 50 tons of such bonds to raise around Rs.13,500 crore in the current financial year.
