Cabinet approves gold monetisation and gold bond schemes

09 Sep 2015 Evaluate

In order to reduce the metal's demand in physical form and fish out idle gold lying with households and other entities, the Union Cabinet, chaired by the Prime Minister, Shri Narendra Modi, has approved Gold Bond and Gold Monetization Schemes. Under the Gold Monetization Scheme, the objective is to reduce the country's reliance on the import of gold & put it to productive use. Under this scheme, people can deposit idle gold with authorised agencies for either short, medium or long term and take advantage of the price escalation of gold as well as earn interest on the deposit, for which they will be given certificates of holding.

For short-term deposits, the customer will have the option of redemption, for the principal deposit and interest earned, either in cash (in equivalent rupees of the weight of deposited gold at the prices prevailing at the time of redemption) or in gold (of the same weight of gold as deposited), which will have to be exercised at the time of making the deposit. In case the customer will like to change the option, it will be allowed at the bank's discretion. Redemption of fractional quantity (for which a standard gold bar/coin is not available) would be paid in cash. For medium and long-term deposits, redemption will be only in cash, in equivalent rupees of the weight of the deposited gold at the prices prevailing at the time of redemption. The interest earned will however be based on the value of gold at the deposit on the interest rate as decided.

Earlier in May, seeking to mobilise large amount of idle gold held by households and institutions, the government had proposed a new scheme offering tax-free interest on depositing the yellow metal with banks. The draft gold monetisation scheme also provides for incentives to the banks, while individuals and institutions can deposit as low as 30 gm of gold, while the interest earned on it would be exempt from income tax as well as capital gains tax.

Under the Gold Bond scheme Indian residents can buy the gold bonds, instead of buying physical gold. The Gold Bond scheme will have an annual cap of 500 grams per person and such bonds would be issued for a period of 5-7 years. Under this scheme, the bonds will be issued in 2, 5 and 10 grams of gold or other denominations so that it protects investors from medium-term volatility in gold prices and also will be available both in demat and paper form. Further, Bonds will be issued on behalf of the Government of India by the RBI. Thus, the Bonds will have a sovereign guarantee. The issuing agency will need to pay distribution costs and a sales commission to the intermediate channels, to be reimbursed by Government. The government will declare interest on the bonds from time to time. The redemption of gold bonds will be done by banks, NBFCs and other authorized entities. Earlier, the Budget 2015-16 had proposed to launch a Sovereign Gold Bond (SGB) scheme to develop a financial asset as an alternative to gold. The gold monetisation scheme was also announced in the Budget for 2015-16.

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