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Gold Deposit Scheme - All You Wanted to Know
January 22 , 2013

Gold is contemporary and we love to accumulate it. Especially when the markets are not doing great most people tend to think there is nothing like gold to invest in. However this tendency has made the government very uncomfortable lately because huge imports widen its Current Account Deficit. Gold Deposit Scheme is one way the government thought out to cure this peril.

Under this scheme physical gold can be deposited in return for a certificate and interest is earned on gold otherwise lying idle at home or in vaults. You can save on storage cost and be carefree about its safety as well. Sounds great? Read on to know about the scheme and whether you can tap it.

Gold Deposit Scheme- the start

The history dates back to 1999 when RBI introduced it and allowed commercial banks to start Gold Deposit Scheme but it wasn't until 2009 that one bank-State Bank of India launched the deposit scheme.

The idea behind the scheme was to bring idle gold lying with individuals and households into circulation by making it available to jewelers for industrial use or export, for direct domestic sale or for sale to other banks. Gold deposit scheme was aimed at reducing the country's liability on gold imports since about 80% of gold requirement is met through gold import.

The scheme has not been popular and this is hardly surprising since many of its features, in terms of minimum deposit requirements, interest return, storage standards etc are not attractive for retail customers.

Features of Gold Deposit Scheme

Who can deposit

Gold Deposit Scheme is meant for individuals (singly or jointly), HUFs, trusts and companies. NRIs cannot deposit in this scheme.

Minimum deposit

At least 500 grams of gold has to be deposited. This higher limit locks out individuals. The scheme is mostly viable for trusts of temples where gold is amassed in tons. There is no upper limit for deposit.

Deposit term and repayment

Gold can be deposited for a maturity term ranging from 6 months to 7 years. At maturity your gold deposit can be collected in physical form as gold bars or in equivalent rupees.

You can have premature repayment after a lock-in period and on payment of penalty interest. Presently for SBI Gold Deposit Scheme there is 1 year lock-in period.

Interest

Banks can decide on the interest rate they wish to pay on gold deposit subject to RBI's rate directive. SBI has been paying 0.75% on gold deposit of maturity 3 years and 1% on maturities of 4 years and 5 years. This one is not a motivator.

Taxes

For the gold deposited in Gold Deposit Scheme no Wealth Tax has to be paid. Wealth tax applies if your net worth is above Rs 30 lakhs and physical gold is an asset that counts under net worth. The interest earned under the scheme is Income Tax exempt. On selling your Gold Deposit Scheme certificate or while redeeming if you make a profit no Capital Gains Tax has to be paid.

How Gold Deposit Scheme works

If you have gold coins, gold bars or even gold jewelry you don't intend to use you can deposit them at banks offering the scheme (presently only SBI does and you have to approach one of its 54 designated branches). The bank would ascertain purity of gold and to bring it to uniform purity of 999 fineness. In the process your gold will be melted into bars after removing any non-gold substance.

You would be issued a Gold Deposit Scheme certificate or a passbook (SBI offers GDS certificate) based on the report of the mint where it is melted (Govt Mint at Mumbai, in case of SBI) within 3 months of depositing. This certificate is transferable which means you don't have to worry in case you want to sell the gold deposit. You can nominate someone for your Gold Deposit Scheme certificate. Depending on the bank you can avail loan against the deposit certificate (SBI offers loan up to 75% the value of gold deposit).

Interest may be compounded or non-compounded. It is paid in rupees either at maturity or at the intervals chosen.

At the end of the term you can collect your deposit by producing gold deposit certificate at the nodal branch at least a month before maturity date. Don't be surprised if it weighs less than what you had deposited because the purification process might remove impurities to make it of standard purity. At redemption you would get gold bars of highest purity from the same branch where you deposited it.

Other gold deposit schemes

Gold deposit schemes are being offered by various jewelers such as Kothari Diamonds & Jewels along the same lines but they are not approved by RBI. Interest offered is as much as 5% for a year and small amounts of 50 gm can be deposited. They offer security cheque worth 60% of the value of gold deposited. Before you consider these it must be remembered that since they are unregulated your gold will be deposited at your own risk. If the shop shuts down, that is the end of the story.

Conclusion

The recent surge in gold demand towards the end of 2012, despite several deterrents like hike in taxes and high price has forced the government to think of alternate ways of curbing huge import of gold. Extremely high imports compared with low exports are unfavourable to a nation's economy since it tilts trade balances to deficit. Trade deficit can weaken the economy by crippling the government's ability to pay back its foreign loans and also by making such loans expensive for it.

There is high cost associated with melting gold and storing it in safe vaults. It is unlikely the minimum deposit requirement in Gold Deposit Scheme will lowered enough to make it viable for individuals and households. Meanwhile the government is considering allowing gold deposits lying with mutual fund houses managing gold ETFs to be deposited in Gold Deposit Scheme.

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