Gold Monetisation Scheme

The Gold Monetisation Scheme (GMS), launched by the Government of India on 5 November 2015, is an ambitious financial initiative aimed at mobilising the vast reserves of idle gold held by households, trusts, and institutions across the country. The scheme allows individuals and entities to deposit their gold with banks and earn interest on these holdings, thereby bringing privately held gold into the formal financial system. It was introduced as part of a broader reform strategy, alongside the Sovereign Gold Bond Scheme and the Gold Coin/Bullion Scheme, to reduce India’s dependence on gold imports and promote a more productive use of domestic gold assets.

Background and Rationale

India has traditionally been one of the largest consumers of gold globally, with an estimated 22,000–25,000 tonnes of gold held by households, religious trusts, and private institutions. However, much of this gold remains idle in the form of jewellery, coins, or bars, contributing little to economic activity.
Excessive gold imports — averaging around 800–1,000 tonnes annually — have historically placed pressure on India’s current account deficit (CAD) and foreign exchange reserves. Recognising this challenge, the Government of India decided to launch the Gold Monetisation Scheme to:

• Channel domestic gold into the financial and banking system.
• Provide interest-bearing returns to gold holders.
• Reduce gold imports by recycling domestically available gold.
• Enhance the liquidity and productivity of the nation’s gold resources.

The GMS replaced earlier, less successful schemes such as the Gold Deposit Scheme (1999) and the Gold Metal Loan Scheme (1998), offering greater flexibility and better incentives for participants.

Objectives of the Scheme

The primary objectives of the Gold Monetisation Scheme are:

1. To mobilise gold held by households and institutions and channel it into the formal economy.
2. To provide interest income to gold owners for their idle gold holdings.
3. To reduce India’s reliance on imported gold, thereby improving the trade balance.
4. To utilise mobilised gold for productive purposes such as jewellery manufacturing and meeting domestic demand.
5. To integrate gold with the banking system, promoting financial inclusion and stability.

Key Features of the Scheme

1. Eligibility

The scheme is open to:

• Individuals (residents of India).
• Hindu Undivided Families (HUFs).
• Trusts and charitable institutions.
• Companies and other entities holding physical gold.

2. Acceptable Forms of Gold

The scheme accepts gold in the form of:

• Jewellery (without embedded stones or metals).
• Coins and bars.All deposited gold must meet prescribed purity standards after testing and verification.

3. Minimum Deposit

The minimum quantity of gold that can be deposited is 30 grams, with no maximum limit specified.

4. Designated Collection and Purity Testing Centres (CPTCs)

Depositors must first take their gold to a Collection and Purity Testing Centre (CPTC), which is authorised by the Bureau of Indian Standards (BIS).

• The CPTC verifies and melts the gold to determine purity.
• After verification, the depositor receives a receipt, which can be presented to a designated bank to open a gold deposit account.

5. Types of Deposit Accounts

The scheme offers three types of deposits:

The STBD is maintained by participating banks, whereas MTGD and LTGD are handled by the Central Government through the Reserve Bank of India (RBI).

6. Interest Rates

• Interest is paid on both the quantity and the value of the deposited gold.
• Interest rates are periodically determined by the Central Government and participating banks.
• For instance, during the initial phase, the government offered approximately 2.25% for medium-term and 2.5% for long-term deposits per annum.

7. Redemption Options

Depositors can choose to redeem their investment either in:

• Gold, equivalent to the quantity deposited (subject to conditions), or
• Indian Rupees, based on the prevailing gold market price at the time of redemption.

8. Tax Benefits

The scheme offers several fiscal incentives:

• Exemption from capital gains tax on appreciation in gold value.
• No wealth tax on gold held under the scheme.
• Interest earned is exempt from income tax under certain conditions, as notified by the government.

9. Safety and Transparency

The scheme ensures a fully transparent and secure process through authorised CPTCs and BIS-certified refiners, ensuring depositor confidence and quality assurance.

Operational Framework

The operational flow of the Gold Monetisation Scheme can be summarised as follows:

1. Collection: The depositor takes physical gold to a BIS-certified CPTC for testing and melting.
2. Purity Verification: The gold’s purity and weight are assessed, and the depositor receives a certificate.
3. Deposit Creation: The depositor submits the certificate to a participating bank to open a gold savings account.
4. Mobilisation: The bank or government utilises the deposited gold for:
   • Lending to jewellers and manufacturers.
   • Meeting domestic gold demand.
   • Contributing to the issuance of Sovereign Gold Bonds.
5. Interest and Redemption: The depositor earns periodic interest and can redeem the deposit in gold or cash after maturity.

Role of Key Stakeholders

1. Reserve Bank of India (RBI):Oversees the monetary management of medium- and long-term deposits and ensures smooth policy implementation.
2. Commercial Banks:Operate short-term deposits and facilitate gold lending to jewellers, ensuring liquidity and circulation.
3. Bureau of Indian Standards (BIS):Accredits CPTCs and refiners, ensuring standardisation and purity of gold.
4. Collection and Purity Testing Centres (CPTCs):Conduct purity verification, melting, and certification of deposited gold.

Benefits of the Scheme

For Depositors

• Interest earnings on otherwise idle gold.
• Safe storage and insurance of gold assets.
• Tax exemptions on interest and capital gains.
• Liquidity through easy redemption in gold or money.

For the Economy

• Reduced gold imports, helping narrow the current account deficit.
• Enhanced financial inclusion, integrating gold into formal channels.
• Development of gold-backed financial instruments.
• Strengthening of domestic refining and bullion industries.

For Banks and the Jewellery Sector

• Enables banks to lend gold to jewellers, ensuring steady supply for manufacturing.
• Reduces jewellers’ dependence on imported bullion.

Challenges and Limitations

Despite its strong conceptual design, the Gold Monetisation Scheme faced several implementation challenges:

• Low public participation: Many households are reluctant to part with gold jewellery due to sentimental or traditional value.
• Limited infrastructure: Few Collection and Purity Testing Centres were operational in the initial years.
• Complex procedures: Melting and testing requirements discouraged small depositors.
• Lack of awareness: Limited publicity and understanding among rural populations.
• Cultural attachment: Gold in India is viewed more as a family heirloom than a financial asset, affecting deposit willingness.

Measures for Improvement

To improve participation, the government and banks have:

• Expanded the network of Collection Centres and authorised refiners.
• Simplified documentation and procedural requirements.
• Increased public awareness campaigns through banks and media.
• Offered flexible redemption options and better interest incentives.

Relationship with Other Gold Schemes

The Gold Monetisation Scheme complements two other major initiatives introduced in 2015:

Together, these schemes form an integrated approach to modernising India’s gold market and promoting sustainable financial growth.

Economic Significance

The Gold Monetisation Scheme holds strategic importance for India’s macroeconomic management:

• Encourages domestic resource mobilisation.
• Reduces dependence on external gold inflows.
• Enhances the efficiency of gold utilisation in the economy.
• Strengthens the financial system’s depth and diversity.