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March 7, 2000

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Using the gold deposit scheme effectively

Larissa Fernand

Lots of gold lying in the safe deposit vault? The gold deposit scheme should suit you fine. Here's to what exactly it is all about.

How does the scheme work?
If you have any solid gold in the form of jewellery, coins, bars or biscuits, you can hand it over to the bank for a fixed tenure, which varies from three to seven years. During this time, you get a fixed return, which is actually very low: a meager 2 per cent to 4 per cent, depending on the tenure. The longer the tenure, the higher the interest rate.

Why would anyone want to invest with such low rates?
For one, the scheme is targeting idle gold. The jeweller next door does not offer you a good rate for it. Moreover, if you have no intention of selling it, then might as well earn something on it. And the good part is that you don't pay any tax on the interest earned, no wealth tax and no capital gains.

Some banks may offer a differential rate of interest for big deposits. So if you deposit, say over 10 kg of gold, then you get a higher interest rate (but it will not exceed 4 per cent). Also banks could even give you a loan based on these deposits.

Which are the banks offering this facility?
The RBI has designated a few banks such as State Bank of India, Corporation Bank, Canara Bank and Allahabad Bank. Each bank can set its own interest rate within the above mentioned limits. They can also fix the minimum amount of deposit which they will accept (example, 200 grams or 250 grams). Each will also fix the lock-in period which could be around a year. So if you opt for a premature withdrawal, you will have to pay a penalty.

How is the purity of the gold determined?
It starts with a preliminary appraisal. The depositor has to pay this fee and if he is not happy with the verdict, he can decide against investing in this scheme. If he goes ahead, the gold is then assayed (process of ascertaining the content of gold caratage). This fee is also paid by the depositor. It can be done at any government mint, a private sector facility or international assaying facility. The State Bank of India along with Allahabad Bank, Corporation Bank and Canara Bank are launching a gold assaying company with Credit Suisse as the foreign partner. The weight of pure gold that is determined will be entered in the certificate.

How are the returns computed?
The depositor has the option of taking the interest earned annually or in a lumpsum at the end of the tenure. The latter is a better option since the interest will be compounded over the tenure and you can benefit of a higher amount. But at the time of redemption, you have the option of getting your investment either in cash or gold.

Opt for cash? Then the price of gold prevailing that day will be the benchmark. Three factors will be taken into account: the international price of gold, the rupee conversion rate and the prevailing custom duty on the import of gold.

Want your gold back? You'll get it in the form of a standard gold bar of 0.995 fineness. This will be in multiples of 10 gm. Any fraction quantity in excess of 10 grams will be repaid in rupees.

Does that mean I will not get my jewellery back?
This is one big drawback of the scheme. Once you surrender your gold and jewellery, it will be melted. So if the workmanship and design is exquisite, then this is lost. So opt for it only if you have gold in bullion form or you really don't mind parting with jewellery which has no sentimental or antique value.

If you opt for gold, and not cash, at maturity, the then prevailing price will be taken into account, so you do benefit if the price of gold rises.

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