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A golden investment opportunity

Tinesh Bhasin in Mumbai | April 10, 2009 17:17 IST

With high volatility in the stock market, investors are looking for other options like debt and gold. However, when it comes to gold, most investors find it a difficult proposition because of the storage cost and wealth tax it entails.

While the storage cost could be anywhere between Rs 500 and Rs 20,000 per year, depending on the institution, wealth tax would be 1 per cent of the gold value exceeding Rs 15 lakh (Rs 150,000).

But now you can not only save these costs, but also earn interest on the gold you own. State Bank of India [Get Quote], the country's largest bank, has launched a gold deposit scheme to address this issue.

All you have to do is take a minimum 500 grams of gold to one of the select SBI branches, specify the tenure and deposit the metal. The interest rate for a 3-year deposit is 1 per cent, for four years it is 1.25 per cent and for a five-year tenure it is 1.5 per cent. And, on top of it, the income from this deposit is tax-free. "This is possible because when you deposit the gold, SBI gives you a gold bond. And there is no wealth tax on gold held in paper or electronic form," said Kanu Doshi, a chartered accountant.

According to financial planner Gaurav Mashruwala, if one adds up the tax saved, the storage cost and the interest income, it turns out to be very attractive for high networth individuals. "But it does not make sense to go in for fresh purchase to invest in this scheme. One can, rather, invest in gold exchange-traded fund," added Mashruwala.

On maturity, the bank gives you an option to either take the gold or cash equivalent to the gold's value at that time. And, even if you are making a profit in this bargain, there is no capital gains tax on this transaction.

SBI melts the deposited gold to check the purity and then converts it into bars. Depending on the results, SBI sends a gold deposit certificate within 90 days. The bank bears all expenses associated with this process.

"We give this gold to jewellers and traders as a loan and earn interest on it," said an SBI official.

In this deposit, all payouts are linked to gold. So, suppose a depositor gives 500 grams of the yellow metal valued at Rs 15,000 per gram for a three-year period. The interest will not be calculated on the value of gold. Instead, the bank will calculate 1 per cent of the quantity deposited, which will be 5 grams in this case, and pay interest equivalent to the cost of 5 grams of gold at that time.

On maturity, the person can either take the yellow metal or money equivalent to the value of gold at that time. SBI also gives loan against this deposit. This loan, up to 75 per cent of the gold value, can be taken from any branch of the bank against the certificates.

The lock-in period of the deposit is one year. Any withdrawal after this period attracts a penalty. The penal cut is 0.5 per cent if withdrawn within three years and 0.25 per cent beyond that.

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