 "Buy gold bonds this festival season")
The Cabinet's approval to two key schemes on Tuesday - gold monetisation scheme and gold bond - can be a good way to reduce the country's import bill due to purchase of the yellow metal.
But does it work as well forthe government's target audience - the individual investor or one who is already sitting on gold?
For a gold investor, it is clearly a good scheme. If the Reserve Bank of India issues these bonds before the festival season, gold investors can clearly go for them.
And for two reasons: One, he can buy and sell gold in paper format which is much more convenient than the physical format.
Two, buying gold coins from banks and jewellers come at a premium, depending on the source. For example, many sellers charge a premium of 10-30% on gold coins and bars for vetting the quality. However, while selling, the buyer is not able to get the same premium.
The bond scheme will take away this anomaly. In addition, bond holders will earn a rate of interest as well on the gold bonds. So, if one holds the bond for five-seven years (the prescribed tenure), he will earn in two ways: positive returns (if the price ofgold rises) and a certain rate of interest.
Clearly, the interest rate advantage will ensure that it is more attractive than gold prices. So, Rs 1lakh invested in gold, even at the rate of 1% annual interest payment, will become Rs 1.05 lakh in five years.
Says a financial planner: "The additionalreturn of interest on gold bonds should encourage investors to put in money into them. Also, with the government allowing trading of these bonds on the exchanges, there will enough liquidity for someone who wishes. However, investorsshould remember that the secondary market will take some time to develop."
With the government allowing investments of up to 500 gms per per year, at existing prices, one person can invest upto Rs 13.28 lakh. And a family of four, a good Rs 53 lakh annually.
"India had spent $ 280 billion in imports of gold in the last ten years. It is more than the foreign institutional investors' inflows in both equity and debt in the same period. In some sense, we became exporter of capital to the world rather than itsrecipient. Against the backdrop, the launch of gold bond and monetisation scheme will help us re-circulate the gold in the Indian economy and savepayment in dollars. I hope the government pushes the scheme like the Jan DhanYojana," says Nilesh Shah, MD, Kotak Mutual Fund.
Similarly, the gold monetisation scheme that is supposed tounlock value of the gold lying idle with households will help families earn some money on their existing gold. The tenure of these deposits will beshort-term (one-three years) with a roll out in multiples of one year, medium-term (five-seven years) and long-term (12-15 years). Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including partwithdrawal).
The short-term deposits can be redeemed either in gold or cash whereas for medium and long-term deposits, redemption will be only incash, in equivalent rupees of the weight of the deposited gold at the prices prevailing at the time of redemption. The interest earned will, however, bebased on the value of gold at the deposit on the interest rate as decided. But there are some worries as well.
For one, despite reduction of the minimum limit to 30 gm, making it a good entry point, many will be worried that the income-tax department will seek the source. Many families hold ancestral gold or Stree dhan (gold that a woman brings to the family on marriage) which aren't declaredwhile filing returns.
"Another worry will be the tax on conversion of physicalgold into the gold monetisation scheme. That is, if the gold was bought at Rs1,000 per 10 gram and converted into a gold deposit scheme at Rs 25,000 per 10 gram, there will be a capital gains tax of 20% with indexation benefits," says an income-tax expert.
If the date of acquiring is not known, April 1, 1984will be used as the base year. Experts believe that the tax should only beimposed when gold is being sold and not when it is being converted like it isdone in case of other asset classes like property or debt.
But does it work as well forthe government's target audience - the individual investor or one who is already sitting on gold?
For a gold investor, it is clearly a good scheme. If the Reserve Bank of India issues these bonds before the festival season, gold investors can clearly go for them.
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Two, buying gold coins from banks and jewellers come at a premium, depending on the source. For example, many sellers charge a premium of 10-30% on gold coins and bars for vetting the quality. However, while selling, the buyer is not able to get the same premium.
The bond scheme will take away this anomaly. In addition, bond holders will earn a rate of interest as well on the gold bonds. So, if one holds the bond for five-seven years (the prescribed tenure), he will earn in two ways: positive returns (if the price ofgold rises) and a certain rate of interest.
Clearly, the interest rate advantage will ensure that it is more attractive than gold prices. So, Rs 1lakh invested in gold, even at the rate of 1% annual interest payment, will become Rs 1.05 lakh in five years.
Says a financial planner: "The additionalreturn of interest on gold bonds should encourage investors to put in money into them. Also, with the government allowing trading of these bonds on the exchanges, there will enough liquidity for someone who wishes. However, investorsshould remember that the secondary market will take some time to develop."
With the government allowing investments of up to 500 gms per per year, at existing prices, one person can invest upto Rs 13.28 lakh. And a family of four, a good Rs 53 lakh annually.
"India had spent $ 280 billion in imports of gold in the last ten years. It is more than the foreign institutional investors' inflows in both equity and debt in the same period. In some sense, we became exporter of capital to the world rather than itsrecipient. Against the backdrop, the launch of gold bond and monetisation scheme will help us re-circulate the gold in the Indian economy and savepayment in dollars. I hope the government pushes the scheme like the Jan DhanYojana," says Nilesh Shah, MD, Kotak Mutual Fund.
Similarly, the gold monetisation scheme that is supposed tounlock value of the gold lying idle with households will help families earn some money on their existing gold. The tenure of these deposits will beshort-term (one-three years) with a roll out in multiples of one year, medium-term (five-seven years) and long-term (12-15 years). Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including partwithdrawal).
The short-term deposits can be redeemed either in gold or cash whereas for medium and long-term deposits, redemption will be only incash, in equivalent rupees of the weight of the deposited gold at the prices prevailing at the time of redemption. The interest earned will, however, bebased on the value of gold at the deposit on the interest rate as decided. But there are some worries as well.
For one, despite reduction of the minimum limit to 30 gm, making it a good entry point, many will be worried that the income-tax department will seek the source. Many families hold ancestral gold or Stree dhan (gold that a woman brings to the family on marriage) which aren't declaredwhile filing returns.
"Another worry will be the tax on conversion of physicalgold into the gold monetisation scheme. That is, if the gold was bought at Rs1,000 per 10 gram and converted into a gold deposit scheme at Rs 25,000 per 10 gram, there will be a capital gains tax of 20% with indexation benefits," says an income-tax expert.
If the date of acquiring is not known, April 1, 1984will be used as the base year. Experts believe that the tax should only beimposed when gold is being sold and not when it is being converted like it isdone in case of other asset classes like property or debt.