If you have gold lying idle in your vaults or in bank lockers, you may be keen to monetise it. After all, idle gold doesn’t earn anything. While its value may increase over time if gold prices rise, you also bear a holding cost in the form of locker rent. Thus as a measure to put the idle gold to effective use, the Government introduced Gold Monetisation Scheme (GMS) vide its proposal in the union budget 2015-16.

How will the Scheme work?

Recently, the Government released the draft outline for Gold Monetisation Scheme (GMS).

As per the draft, anybody with minimum holdings of 30 grams of gold may participate in the Scheme. To make the Scheme attractive, it has been proposed that the depositor may receive tax exemption on interest earns on the gold deposit account and the capital gains thereon.

GMS would be primarily run by Banks and would have a 3-stage process to mobilise idle gold.

Stage 1: Quality check:
The bank will first check on the quality of the physical gold you own, which you wish to convert into paper form in order to participate in GMS. Thus you would have to visit an official hallmarking centre, to obtain the purity and weight certificate Remember in this process, your physical gold (including jewellery, if any) will be melted.

But if you agree to deposit gold with banks, the hallmarking centres will issue purity and weight certificates and the fees would be borne by the bank. At present, there are in all 350 hallmarking centres in India that are certified by the Bureau of Indian Standards (BIS).

Stage 2: Opening Gold Savings Account with a Bank
At this stage you have to furnish the certificate issued by a hallmarking centre to the banks in order to facilitate opening a gold deposit account. The Bank will credit the account with quantity of gold you deposited as per weight. A confirmation on the same would be obtained by banks from the hallmarking centre.

The Banks may take a decision at its discretion, pertaining to the rate of interest payable to you. It is said that banks are likely to pay around 1% of interest under GMS. But a noteworthy point is that the interest too would be accounted in the form of gold.

So say, you deposit 100 grams of gold (which acts as principal in your gold deposit account), you would receive 101 gram of gold after 1 year accounting for interest.

The interest will be payable after 30 -60 days of opening a gold deposit account. The minimum tenure of the deposit may be 1 year. At this stage you have an option to receive maturity amount in cash or gold. Like in case of FDs, you could prematurely break your gold deposit.

Stage 3: Sending Gold to Refiners or lending
Although you as depositor are nowhere involved at this stage, you may like to know as to what the bank is going to do with gold that you offered under GMS.

Well, banks would advise hallmark testing centres to transfer the gold to gold refiners. Gold refiners would store gold in their warehouses. Banks would pay them for their services. At present there are about 32, refiners in India.

Banks may also lend gold it collects to jewellers. It becomes necessary for banks to channelize gold back in the system. Banks will have various options here. It might sell gold in the market and earn foreign currency which may be utilised to meet the borrowing requirements of importers and exporters. They may also sell gold on commodity exchanges.

As a second choice, banks may convert gold in coins and sell to customers. There is one more alternative but it requires more clarity from RBI. Banks may be allowed to hold monetised gold as a part of statutory reserves. If this happens, then banks may have more funds for lending.

Should you participate?

PersonalFN is of the view that, the GMS is an attractive scheme for those who have gold in large quantities. Since the capital gains and the interest earned on GMS is likely to be exempt from the liability of tax, more the gold you have, more you stand to benefit. Interest of 1% may appear lower, but one should not forget that you are also entitled to receive capital appreciation, if any, which again is proposed to be tax exempt as per the draft. Having said this, those with smaller deposits may find the procedure tedious and less remunerative. Moreover, there is no clarity as to why there will be a time lag in accrual of interest.

PersonalFN believes, since the gold would be melted not many individuals would be comfortable participating in the Scheme. In India, along with financial objectives in mind, gold is bought with emotions in mind - such as converting them into jewellery for children's wedding or even for home-based deity. The effectiveness of the scheme may largely depend on the response from temples and trusts, but again the response remains to be seen.

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