by

Rajesh Goyal

What is Gold Deposit Scheme ? What was the purpose for introducing Gold Deposit Scheme 1999?

The Central Government, with a view to bringing privately held stock of gold in circulation, reduce the country’s reliance on import of gold and providing its owners with some income apart from freeing them from the problems of storage, movement and security of gold in their possession, had notified Gold Deposit Scheme 1999 on September 14, 1999.   Then RBI on 5th October, 1999 had formulated guidelines for Gold Deposit Scheme to enable banks authorized to deal in gold to prepare their own Gold Deposit Schemes.    Thus, we can say Gold Deposit Scheme was introduced in 1999 by GoI and was to be implemented through Banks as per guidelines framed by RBI with the following purpose :-

(a) To mobilize the idle gold in the country so that the same can be put into productive use;

(b) To provide an opportunity to the gold holders, to earn interest income on their idle asset (gold) with safety, liquidity and tax benefits, and continue to enjoy the appreciation in the gold prices;

This is an Old Scheme of 1999, why has this been in news in late 2012 and early 2013 ? :
 

The current account deficit has snowballed and it is biggest worry for the Government as FM has hinted in his budget speech on 28th February, 2013.   Reports have been coming that demand of gold and its import is playing havoc with Indian economy in last few months.  High import of gold is adding to the CAD despite efforts by the government to check import of the precious metal.   Gold accounts for second largest import in value terms after oil.   In view of all these, the Gold Deposit Scheme has again come into focus as it has not been very popular during all these years, and economists feel if interest of people in this is generated, it can reduce to some extent the woos of the government.

Some More Salient Features of the Gold Deposit Scheme 1999:

(A) Although, Banks were permitted to float the scheme after approval of RBI, yet few banks have shown interest in the scheme and rarely market the same, as the scheme is cumbersome to run and banks do not feel this to be remunerative.   SBI had launched the Gold Deposit scheme (GDS) earlier in November, 1999, but was discontinued.  The scheme  was re-launched the same in 2009.     However, the scheme is available only at 50+  selected branches of SBI. To make the scheme popular RBI in February, 2013, has relaxed the condition of prior approval of RBI for launching the scheme.   Now banks can launch the same and inform the details to RBI.

(B) Earlier the deposits under the scheme were allowed from three to seven years (SBI allowed only upto five years).   In February, 2013, RBI has relaxed the minimum period condition and thus now banks can frame schemes where deposits will be accepted from six months to seven years.

(C) Interest to be paid is fixed by the concerned bank.   SBI had fixed interest rates for 3 years to be 0.75%, whereas for 4 years and 5 year tenurs, it was 1%.   However, there is interest aspect to this as  Interest is calculated in Gold Currency (XAU) based on principal quantity of deposit and applicable rate of interest. Effectively, you get interest amount calculated in gold terms.   The conversion of interest from Gold Currency to rupees will be made at the London AM rate (London’s morning rate) and RBI Reference rate for Dollars on the date of maturity or on the day of payment.

(D)  These deposits could be made by (a) Individual (s); (b) HUF; (c) Trust and (d) Company.   Now in February 2013, when liberalizing the scheme, Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations have also been allowed to deposit part of their gold with the banks under the scheme. 

(E)  These deposits are exempted from income tax, wealth tax and capital gains tax

(F) The procedure for opening of account :   The customer is usually required to submit an Application Form and complete the formalities of KYC like identification proof, address proof.    the gold offered to be deposited may be in any form including gold bars, coins, Jewellery etc.    After preliminary testing, the tentative weight and purity is conveyed to the customer and after his approval, the gold is sent to Government of India Mint. Mumbai where it will be melted, assayed, minted and converted into bars. The bank will issue the Gold Deposit Certificate for pure gold contents (999 fineness) . All expenses in connection with assaying of gold  are borne by the bank.

(G) The depositor has the option to get maturity payment either in gold (in pure form) or in equivalent cash as on the date of maturity or payment. The Premature payment is permitted after a lock-in period of 1 year with a penalty as applicable.