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Potential Reforms For The Gold Monetization Scheme

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Gold Monetization Scheme in India

No income tax-related queries by the tax authority for a deposit of up to 100 grams of gold – Will it make the gold monetization scheme more appealing?

By: Tavaga Research

The Government of India in 2015 launched the Gold Monetization Scheme (GMS) to tap the Indian households’ inventory of unused gold. The idea of the scheme is to monetize the idle 25,000 tonnes of household gold. Primarily, the scheme aims to reduce the impact of gold on the country’s imports. To lure the gold-owning citizens to sign up for the initiative, the scheme promises to pay annual interest on the gold deposit.

Gold has proven to be a haven for the most part as the markets steer their way through the uncertain pandemic-induced times. Gold has returned approximately 20 percent in the past two quarters. With the gold price hovering about the all-time high, the import bill for the Government will be put under a lot of pressure. To avoid a widening of the trade deficit, the Government is likely to incentivize GMS even further.

What are the features of the Gold Monetization Scheme (GMS)?

The process starts with the gold owner initiating an agreement with the bank. The bank, after verifying the details of the depositor, directs the depositor to government authorized Collection and Purity Testing Centres (CPTC). After an assessment of the purity of gold holdings (either jewelry or bullion), the depositor is issued a receipt by the CPTC. The receipt is submitted at the bank to earn a certificate of deposit. At the time of withdrawal, the depositor gets the equivalent amount of money or equivalent quantity of gold coins or bars. The key points under GMS are:

  1. Gold in any form is an acceptable deposit, bullion or jewelry, except for jewelry embedded with stones. The minimum quantity of gold that can be deposited under the scheme is 30 grams
  2. Gold can be deposited for three tenures: Short-term (1-3 years), medium-term (5-7 years), and long-term (12-15 years). A penalty will be imposed if the investor wishes to withdraw the gold deposit before the completion of tenure
  3. Interest payable annually on the deposit is up to 2.5 percent, varying with the term of the deposit. Interest and capital gains on the gold deposited arising are exempted from tax
  4. The deposits can be made with any bank designated to be a scheduled bank as per the RBI. To make the deposit, the investor will have to open a gold deposit account, which is similar to that of a savings bank account requiring similar KYC
  5. Residents of India, HUFs, Mutual Funds, and ETFs registered under SEBI qualify for this scheme

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What should we hope for in GMS 2.0?

GMS has been able to mobilize approximately 20 tonnes of idle gold, which is a meager 0.08 percent of the total household stockpile. With the GMS still in the infancy stage, the Government is expected to tweak the scheme long enough for the benefits to outweigh the concerns. The following points reflect the industry opinion of what’s necessary:

  • The Gem and Jewelry Export Promotion Council (GJEPC) has suggested linking GMS with the Income Tax Act which pertains to the extent of gold jewelry per family member that shall not be seized. It comes down to the fact that many households refrain from reporting the quantity of gold as they lack the appropriate documentation that verifies legitimacy. Given that gold is accumulated over generations in a family, assurance from the Government is likely to motivate individuals with a genuine lack of documentation to enroll for the scheme. 
  • As per the Law, 500g per married woman, 250g per unmarried woman, and 100g per male member of the family will not be seized in case of an income mismatch. The industry also urges for an upward revision of the limits itself within the Act.
  • The deposit certificates obtained under GMS may be made tradable. Such a move will attain a higher degree of asset monetization. Tradability of deposit certificates is bound to impart liquidity under the scheme
  • The minimum deposit requirement of 30g may be reduced to expand the coverage of GMS
  • The gold deposit amount takes a hit to the extent of making charges and processing loss associated with the process of melting jewelry to convert it into standardized gold. The capital loss can be compensated for by offering a higher interest amount on the gold deposit

All of the above-suggested reforms combined with the inherent features of GMS make the scheme lucrative for gold owners, just like gold ETFs. Gold investors can do away with the hassles of maintaining gold in the physical form. Gold carries a cost of storage as gold owners typically turn to bank lockers for safety and prevention of theft. Insurance costs for physical gold is an add-on over and above the locker charges.

What are the likely amendments to be proposed by the Government?

Of the possible amendments concerning GMS, the following are likely to be proposed in the Government policy:

  • No income tax-related queries will be initiated by the tax authority for a deposit of up to 100 grams of gold per person under the GMS
  • The scheme is expected to be made mandatory for all state-run banks. As opposed to the present situation, where the participation for all the banks is voluntary, the public sector banks may soon have to launch the scheme as part of business as usual

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