Interest on gold deposits may be exempt from tax

Gold monetisation scheme favours allowing banks to use deposits as reserves

The government has proposed exempting interest earned on gold deposits from income tax, wealth tax or capital gains tax.

It is examining the option of allowing banks to use gold deposited under the monetisation scheme announced in the Budget as a part of their cash reserve and statutory liquidity.

Apart from these incentives, the draft gold monetisation scheme announced on Tuesday sought to rope in small investors by lowering the minimum gold that can be deposited to 30g from 500g in the existing gold deposit scheme.

The finance ministry has sought comments on the draft scheme from stakeholders by June 2.

 

While the scheme has left the decision of interest rates to banks, experts said it could be around one per cent. Both the principal and interest to be paid to depositors will be valued in gold. If a customer deposits 100g of gold and receives one per cent interest, he has a credit of 101g after a year.

Depositors will also have the option to receive gold on maturity, but they have to decide at the time of depositing.

Banks have been given various options for using the gold collected,  including selling to generate foreign currency, selling coins to customers and lending to jewellers. However, banks will also be allowed to buy and sell on domestic commodity exchanges, where mobilised gold can be delivered.

Such options aren't available to banks in the existing deposit scheme. Experts said the options were designed as incentives for banks to pay a higher rate of interest to depositors.

The government said initially, the scheme would be launched in select cities. Over time, as the infrastructure for assaying and refining gold develops, it could be extended to other cities.

"This draft reflects a practical approach. Once the incentive framework falls into place to the satisfaction of banks, customers and others, we will have a uniquely Indian scheme that allows gold to become a dynamic, fungible asset in the hands of gold savers, with significant benefits to the economy," said Somasundaram PR, managing director, India, World Gold Council.

The scheme is aimed at mobilising idle gold held by households and institutions, providing a fillip to the gems and jewellery sector, and reducing reliance on import of gold. The draft proposes 350 hallmarking centres for initial purity tests. Later, gold brought by customers will be melted there.

If customers agree to deposit gold with banks, the centres will issue purity and weight certificates and the fees will be paid by banks.

Half the hallmarking centres are set up by jewellers, so they will market the scheme, something not allowed now.

Sudheesh Nambiath, senior analyst, precious metals, GFMS, Thomson Reuters, said, "The operational aspect of the scheme is on a loose thread until the BIS steps in to bring faith in the hallmarking centres. It is too optimistic to consider banks will accept all 350 centres as purity testing centres unless they own the risk after the fire assay test. Secondly, three or four hours of fire assay is a too short time for credible work. Thirdly, NABL accreditation should be applicable on multiple processes, that again will bring down the number of refineries to single digits."

Interest will be payable after 30 or 60 days of opening the account. The scheme will have a maturity of one year and multiples of that with a facility to break the lock like in normal bank deposits.

Banks will be able to keep gold with refiners, which are 32 at present. While lending gold to jewellers, banks will have to recover costs and keep a margin for profit.

Currently, gold can be imported on consignment basis with 1.2 per cent lease rent and hence banks will prefer to pay 1 per cent interest to avoid arbitrage. Interest rates for jewellers for gold loans at present are in the range of 4-4.5 per cent.

One banker involved with the existing gold deposit scheme said the new scheme could succeed because the logistics of collecting gold and refining it had been taken care of by involving hallmarking centres and reducing the minimum deposit from 500 gm to 30 gm.

The facility to use gold as reserve, if provided, will ensure the gold mobilised is not idle.

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LIKELY SCENARIO

• Interest rates left to banks, could be about 1% payable in gold terms; tenure one year and multiples
   
• Banks might get flexibility to use the gold mobilised to meet CRR/SLR norms
   
• Returns payable in gold terms, depositors have the option to receive maturity amount in cash or gold
   
• 350 hallmarking centres, including those set up by jewellers, will give purity certificates. This means the indirect involvement of jewellers

CURRENT SITUATION

• 15 tonnes gold mobilised in 15 yrs
   
• 8 tonnes by SBI, 7 tonnes by three other banks
   
• Temples are the biggest depositors, especially two temples in the South and a Mumbai-based one
   
• 1,000 tonnes of gold imported by India a year, on an average
   
• 22,000 tonnes of gold estimated to be with Indian households