The program was started by the government in 2015 with the intention of putting unused gold stored by individuals in their homes and in bank lockers for productive use. However, the program didn’t 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?
According to the rules of the program, gold – jewelry, ingots, artifacts – must be deposited with the bank, and in turn, the bank will test its purity. Once the purity of the gold jewelry is verified, they melt the gold jewelry and convert it into ingots or gold coins.
So, if a person deposits jewelry such as gold bracelets or necklaces with the bank to earn interest from it under the program, then at the time of maturity, the bank will not return the gold deposited under. the same shape.
This seems to be the main reason why many have not opted for this scheme because for many Indians, gold jewelry has sentimental value attached to it. They want the gold to be returned in the same form it was deposited.
Plus, keeping gold jewelry in the home provides financial security for many in the event of an emergency. An individual may find it easier to sell their gold jewelry to a local jeweler in the event of a medical emergency or loss of income than it is to find a buyer for gold bonds in the secondary financial market. Additionally, when selling gold, individuals are not required to go through the Know-Your-Customer (KYC) process.
Harshad Chetanwala, co-founder of MyWealthGrowth, a financial planning company, says: “There are several reasons the program has not received the expected response. Investing and saving in gold is very traditional in India and in some parts of the country it is like the culture. There was a lack of will to monetize this gold which has accumulated over the years. According to the scheme, this gold was converted into bullion and coins, so the accumulated gold purchased over the years in different forms and forms is lost as As soon as you deposit the gold. There was also a lack of awareness and information about the program. In India, most of us buy gold to hold it for the long term, and that goal, too, somewhere was defeated in the program. ”
Will gold deposit in GMS be right for you?
For the above reason, someone who has purchased and stored gold jewelry for future use, such as a child marriage, etc. may hesitate to invest in GMS. Additionally, if someone is keeping gold as a quick and easily liquefied monetary backup for a rainy day, they may also not see GMS as very suitable.
However, those who buy gold only as an investment may find GMS attractive. A major challenge with physical gold is safe and profitable storage. As the value of gold surely increases, its physical storage in bank lockers comes at an additional cost. In addition, the gold stored in the lockers is not insured by the bank offering the locker.
Some financial experts are of the opinion that GMS is a safer option for storing gold (in terms of risk of theft / loss) which has the added benefit of generating interest on the deposit. Added to this is the tax advantage.
According to the State Bank of India (SBI) website, GMS is available in three modes: Short Term Bank Deposit (STBD), Medium Term Government Deposit (MTGD), and Long Term Government Deposit (LTGD). The minimum gold deposit 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 the deposits can be placed for 5 to 7 years and under LTGD the term is 12 to 15 years. According to the SBI website, the current interest rates are as follows:
The depositor will earn simple interest annually which is paid or cumulative interest (compounded annually) depending on the investment option chosen at the time of depositing the gold.
1. In case of STBD:
2. Interest rate on MTGD: 2.25% per annum
3. Interest rate on LTGD: 2.50% per annum
At maturity, repayment can be made either in gold or in monetary equivalent. “However, 0.20% administrative fee will be levied in the event of a gold redemption,” according to the SBI website.
A penalty is applicable if the deposit is broken before the deadline. The rules for prepayment are as follows:
Interest received is exempt from capital gains tax, wealth tax and income tax. Banks designated by the RBI 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, keep in mind that interest on gold deposits will be calculated in monetary terms rather than gold. This would mean that no additional gold will be added to your deposits, rather you would be paid in monetary terms by reference to the value of the gold at the time of deposit. This change in the calculation of interest was made in April 2021.
This content was originally published here.