Safe Investment haven for Gold Investors

With the onset of marriage season, Gold takes center stage. So much so that it becomes season of gold. Now once again we have stepped into the season of gold investments which has given spectacular returns as an asset class in the last five years. In my previous articles I have discussed various avenues of investment for Gold like ETF and E Gold. With this article I want to apprise readers about one more avenue Gold Deposit Scheme which will enable them to get the benefits of investments in gold with additional benefits of earning income on the same while saving on the cost of insurance and storage along with retaining the right to receive the appreciation in the price of Gold. This Gold Deposit Scheme was introduced in 1999 by Government of India with the objective to save on precious foreign exchange by utilizing the vast gold holdings lying with Indian household and various religious trusts. This article will elaborate on various facets of Gold Deposit Scheme. Basics of the Scheme Under this scheme the owner of gold gets a certificate of gold against delivery of the physical gold with the designated banks. Here you can tender gold in the form of gold bars, coins and even jewellery. While making the application under this scheme you have to submit the proof of your address and identity with a list of inventory of gold tendered. The bank branch will issue you a provisional receipt while accepting the gold tendered by you. The gold received from you is first tested for its purity by way of non destructive method and the provisional percentage of purity is conveyed. You have the option to withdraw the tender if you are not satisfied with the provisional purity ratio on payment of nominal charge to cover the cost of initial testing. But if you accept the results of intial testing, then the gold received is sent for melting and assayed and minted in the Government Mint. Based on the purity of the melted gold at this stage, the Certificate of gold deposited is issued for equivalent pure gold content i.e. 0.999 purity. Broadly, banks can issue you a certificate or a statement of account or a passbook for the gold deposited. Any Individual whether singly or jointly can make an application under this scheme. Even an individual can make the deposit on behalf of a minor. In addition to individuals, the application can also be made in the name of HUF, Trust or Companies. The trust making the application can be a pure charitable or religious one. You can avail the benefit of nomination for these bonds provided the deposits are made in your individual name. The nomination facilities are not available in case the applications are made in the name of HUF, Trust or Companies as these entities have perpetual existence.

For making an application under this scheme, you need to tender minimum 500 Grams of gold (approx. market value around Rs. 14,74, 000/- ). However there is no upper limit upto which you can avail the benefits under this scheme. The deposit can be made for 3 years, 4 years or 5 years. These deposit certificates can be requested in the denominations of your choice. However, the number of certificates to be issued for each tender shall not exceed five. The minimum denomination of the certificate is 500 grams. These deposit certificates are transferable by endorsement and delivery. Effectively these are bearer in nature. After expiry of the tenure opted by you, you have the option to renew these certificates for further periods of your choice. But in case you not want to do this, you can either take delivery of the gold of the same quantity as mentioned on the certificate or alternatively you can opt to receive the amount in Indian rupees on the basis of the rate of gold prevalent at the time or redemption of such deposit. Please note that when you exercise the option to receive the gold in physical form, you will be given gold in bar only and not in the form in which you had surrendered. So what are the benefits of this scheme? First and foremost benefit is that while retaining the benefits attached with the ownership of gold like price appreciation, you do not have to incur any expenditure for the purpose of insurance, safe keeping or costs associates with holding of gold in physical form.. In addition to the above indirect benefits, the scheme offers you a direct benefit in the form of interest which you earn on the value of your gold. The present rate of interest effective from 1st September 2010 are 0.75% p.a. for three years and 1% p.a. for deposit for the periods of four years and five years. The interest is calculated in Gold currency and is paid in equivalent Indian currency. As far as frequency of payment of interest is concerned, you have the option to receive it either on 31st March of every year or lump sum at the time of maturity of the bonds, in which case it is compounded. In case you want to withdraw the gold prematurely, it can be done but you will have to pay a premature penalty in the range of 0.25% to 0.50%, which is adjusted against interest payable to you. Thus these deposits can be withdrawn in order to reap the benefits of temporary and sudden spurt in the prices of the gold and you do not necessarily have to wait for the entire duration of the tenure of the certificates. In addition to the above benefits, you can also avail loans against security of the certificates of gold deposit in Indian Rupees from any bank. What are the tax implications of the scheme? As per the provisions of Income Tax Act, the interest earned on these bonds is exempt from income tax, so there is no tax liability on the interest earned by you on such bonds. In addition to the exemption for interest, these bonds are exempt from payment of wealth tax as well thus additional saving of 1% if your other taxable wealth exceeds Rs. 30 lacs. In addition to the exemption for interest earned and wealth tax under this scheme, these deposit certificates are not treated as capital assets for the purpose of capital gain tax. In

effect the capital appreciation earned by you on gold during the currency of the deposit is exempt in your hand and attract any tax However one very important thing to note is that though the deposits certificates are not capital assets for the purpose of capital gains and any appreciation in the value of such deposits is exempt from payment of tax on capital gains. But this does not hold true when you convert your physical gold into gold deposit certificate. Since the gold deposit certificate is not the same as physical gold and as both the assets are distinct and separate, conversion of your old physical gold into gold deposit certificate will amount to transfer for the purpose of income tax actTherefore such conversion will entail capital gains and based on the holding period of the physical gold and difference between the price of gold as on the date of issue of the certificate and the indexed cost of the physical gold, it will attract capital gains tax @ 20% However in case you feel bullish about gold and want to do some tax planning for investing in gold, gold deposit scheme offers you an excellent avenue for saving on tax, thus boosting your post tax returns on gold. This purpose can be achieved by purchasing the gold in bar form from the market for the purpose of converting the same into gold deposit. Since the time gap between the date of purchase of gold and deposit with the bank will be very small, there will not be any major difference in price between these two dates. Hence you do not have to pay any capital gains tax at the time of tendering gold under gold deposit scheme unlike in case of your old holding of gold. The scheme is operated by many banks, but State Bank of India is a major operator and can be approached for availing the benefits of this scheme. Gold Deposits scheme thus offers excellent tax effective opportunity for high net worth investors who wish to take large long term exposure to gold.