What happens to your gold jewellery in gold monetization scheme?

The government’s Gold Monetisation Scheme (GMS) allows you to deposit your idle gold with a Reserve Bank of India (RBI) designated bank and earn interest on the same. This works similar to a bank fixed deposit. Depending on the tenure of the GMS one opts for, one can earn up to 2.5% interest per annum.

The scheme was launched by the government in 2015 with an intention to put the idle gold stored by individuals in their homes and bank lockers to productive use. However, the scheme did not find many takers -one of the main reasons being what happens to the gold you deposit with the bank.

What happens to the gold deposited under GMS?

As per the scheme rules, the gold – jewellery, bullion, artefacts – is required to be deposited with the bank and in turn, the bank will test its purity. Once the purity of the gold jewellery is ascertained, they will melt the gold jewellery and convert it into bullion or gold coins.

Thus, if an individual deposits jewellery like gold bangles or necklace with the bank to earn interest on it under the scheme, then at the time of maturity the bank will not be returning the deposited gold in the same shape and form.

This seems to be the main reason why many haven’t opted for this scheme because for many Indians gold jewellery has sentimental value attached to it. They want the gold to be returned in the same form as it was deposited.

Further, keeping gold jewellery at home offers financial security to many in case of emergencies. An individual may find it easier to sell his/her gold jewellery to a local jeweller in case of a medical emergency or in the event of income loss than find a buyer for gold bonds in the secondary financial market. Also, while selling gold, individuals are not required to undergo Know-Your-Customer (KYC) process.

Harshad Chetanwala, Co-founder, MyWealthGrowth – a financial planning firm says, “There are a few reasons why the scheme did not receive the response expected. Investing and saving in gold is very traditional in India and in some parts of the country it is like culture. There was a lack of willingness to monetise this gold which was accumulated over years. As per the scheme, this gold was getting converted into bullion and coins, so the accumulated gold bought over the years in different shapes and forms is lost as soon as you deposit the gold. There was a lack of awareness and information about the scheme as well. In India, most of us buy gold to hold it for the long term and this purpose too, somewhere, was getting defeated in the scheme.”

Will depositing gold in GMS suit you?

For the above reason, someone who has bought and stored gold jewellery for future use, like children’s wedding etc. may be hesitant to invest in GMS. Further, if someone is keeping gold as a quick easily liquefiable monetary backup for a rainy day, then too, they may not view GMS as very suitable.

However, those buying gold purely as an investment may find GMS of interest. A key challenge with physical gold is safe and cost-effective storage. While gold’s value surely grows, storing it physically in bank lockers comes at an additional cost. Also, gold kept in lockers is not insured by the bank offering the locker.

Some financial experts are of the view that GMS is a safer option for storing gold (in terms of the risk of theft/loss) which comes with the added benefit of earning interest on the deposit. Added to this, there is the tax advantage.

Features of the scheme

According to the State Bank of India’s (SBI) website, GMS is available in three tenures: Short Term Bank Deposit (STBD), Medium term Government Deposit (MTGD) and Long term Government Deposit (LTGD). The minimum deposit of gold starts from 10 grams with no limit on the maximum deposit.

Under STBD, one can place gold deposits for 1 to 3 years, under MTGD, deposits can be placed for 5 to 7 years and under LTGD, the tenure is 12 to 15 years. As per SBI website, the current interest rates are as follows:

The depositor will earn simple interest annually which is paid out or cumulative interest (Compounding annually) depending on the investment option chosen at the time of depositing the gold.

1. In case of STBD:

  • For 1 year: 0.50% per annum
  • Above 1 year up to 2 years: 0.55% per annum
  • Above 2 years up to 3 years: 0.60% per annum

2. Rate of interest on MTGD: 2.25% per annum

3. Rate of interest on LTGD: 2.50% per annum

On maturity, repayment can be taken either in gold or in money equivalent. “However, 0.20% as administrative charges will be levied in case of redemption in gold,” as per SBI website.

Penalty is applicable if the deposit is broken before the maturity. The rules of premature payment are as follows:

  • STBD: Allowed after a lock-in period of 1 year with a penalty on applicable interest rate
  • MTGD: Allowed to be withdraw any time after 3 years with penalty on interest
  • LTGD: Allowed to be withdraw any time after 5 years with penalty on interest

Interest earned is exempt from capital gains tax, wealth tax and income tax. The RBI designated banks include ICICI Bank, Corporation Bank, Union Bank of India, Indian Overseas Bank, Punjab National Bank, State Bank of India, HDFC Bank, Yes Bank, Dena Bank, -Bank of Baroda.

However, do keep in mind that interest on gold deposits will be calculated in monetary terms rather than in terms of gold. This would mean that no additional gold will be added to your deposits rather you would be paid in monetary terms with reference to the value of gold at the time of deposit. This change in interest calculation has been done in April 2021.

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