The National Institution for Transforming India (NITI Aayog) published a report on transforming India’s gold market in February 2018 and proposed the introduction of a new financial product: Gold Savings Account (GSA). Let us look at its main features, benefits and discuss how and when to use the GSA. As on date, the scheme is only a proposal, but considering its benefits, it may be implemented at least partially. The present article will be updated as and when the scheme is officially announced.
This is the link to the Niti Aayog report about the GSA. Before we begin, please note that actual governance is done by constituting expert committees such as this one and gradually implementing their suggestions. One government will constitute the committee and another government implement it (and advertise as if they did it). It is important to recognise that governance is contiguous and we cannot so easily give credit or place blame on any single party.
Purpose of introducing the Gold Savings Account
The Sovereign Gold Bonds Scheme introduced in November 2015 is not backed by physical gold and this the committee opines makes it unattractive for investors also the bonds have been trading at a premium to the price. According to the report (page 91)
The target mobilisation of the SGBS was set at INR 15,000 crore in 2015-16 and at INR 10,000 crore in 2016-17. The total SGBS subscribed from inception till July 26, 2017 has been INR 4,769 crore
It also feels that while urban India can easily invest in complex financial products, rural Indians prefer to save via physical gold. Therefore the Gold Savings account was introduced to help rural Indians easily buy and sell Gold without making losses, charges and tax at the time of encashment. The GSA has been proposed as an alternative to the sovereign gold bonds scheme.
How will GSA work?
The gold savings account is essentially a bank account (requiring KYC) that can operate as both a savings account or recurring deposit account. So you pay money and as per the current price of gold, your passbook will reflect the amount and value of the gold. Purchases should be made in multiples of 100 milligrams. So if one gram costs Rs. 3,500 and you buy 2 grams, your passbook will reflect that as 2 grams and the price at which you purchased. The price will be decided once a day and so no real-time buying is possible. The purchased units will be paid an interest rate of about 2-2.5 %, the same as the gold monetization scheme. The interest can also accumulate in the form of gold.
Benefit 1: How about the lock-in?
There is no lock-in for the scheme (this is the best benefit) and redemptions can be made at any time in terms of physical gold (the worst feature of the scheme IMO) or cash as per current value. When delivered as physical gold, import duty and GST will apply, hopefully, this will serve as a deterrent.
Benefit 2: What are the costs?
The proposal wants no cost associated with the gold savings account and also want banks to buy and sell gold at the current market price. This is perhaps a bit too much to ask, but even with nominal costs, it should be okay.
How will the GSA be taxed?
As per current law, whether physical gold or cash, capital gains tax will apply: short-term capital gains tax as per slab for a sale <= 36 months and long-term capital gains tax of 20% (plus cess) with indexation benefit. Currently, sovereign gold bonds are free from tax if held until maturity (8 years) but taxable if sold before that.
Niti Aayog wants the capital gains tax removed on physical gold delivery upon redemption from the GSA (pages 132,133). Cash redemptions will be taxable as above. If this is accepted by the government, the interest component if accumulated as gold should also be tax-free upon physical delivery. Interest, if encashed, will be taxable as per slab.
However, since the scheme is meant for rural India, even if the government accepts the proposal, it should (for its own sake and ours) impose a maximum deposit limit. Else the rich in rural and urban India will dump money in here and demand physical gold upon withdrawal. Redemption will only be in INR if physical gold delivery is not possible and/or until it is possible.
Regarding physical gold the committee opines:
The gold accumulated under the GSA may be backed by physical gold without the need for gold imports. It has to be extended to the borrower under GML (gold metal loan), albeit in the form of INR. It may be noted that approximately 6,000–9,000 tonnes of gold valued at approximately INR 18 trillion–INR 27 trillion is lying as inventory across the various members of this industry throughout the nation and it is this inventory that could be used to create the physical backing of gold for the GSA
How far this is practical is a question mark.
My take: If the gold bonds are not popular because there is no physical gold involved, the solution is not to add a physical gold component. Clearly, investors do not understand when to invest in gold and when to buy it. Better education is necessary or simply not provide a physical gold option with a lower tax rate as an incentive. Without proper awareness, I don think GSA will make a difference in helping the government reduce gold imports and/or help people use gold savings better.
How & When to use the GSA?
If the GSA does come through, it can be used as a proxy for accumulating gold under two circumstances: (1) the investor is scared of taking risks and want to shy away from the stock market (although gold price is far more volatile than stocks: Gold is riskier than Stocks! (2) the investor does not have enough time to invest in the stock market.
In both circumstances, gradually buying units in the gold savings account and redeeming it at the time of need will ensure there is enough money left for buying gold jewels, say for a marriage. Since the investor is tracking gold (24 carats), there is no price risk here. The jewels will be of 22 carats and this will compensate for the making loss and charges.
The big advantage with the GSA is that there is no lock-in. If the gold price zooms up, you can book profit. Even if the crashes, still there is no risk if the end goal is to make jewels.
When to use the GSA
- When you wish to trade in gold without requiring a demat account
- When you wish to accumulate money for buying gold for a marriage with no risk. Note: this is only for jewel expenses. For the rest, it is better to invest elsewhere. Remember marriage expenses increase at a rate of 10%+ year on year and gold “over the long term” only increases 8-9% year on year.
How to use the GSA
- For trading use a technical indicator (eg. moving averages) to enter and exit
- For accumulating, simply calculate how much gold you need and gradually accumulated each month.
Depending on the costs and limits, the GSA is likely to be superior to gold bondsETFsfs and index funds. Note, there is no need to invest in gold or use gold-based products, for, say a marriage. However, for those who seem strongly about them, the GSA is a good option. Read more: Smart ways to accumulate gold for a marriage
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