Schemes for Gold Management in India — Gold Deposits, Sovereign Gold Bond, and Gms Comparison

India is one of the largest consumers of gold globally, with domestic demand predominantly fulfilled through imports. This persistent demand places pressure on the Current Account Deficit (CAD) and ties up substantial private capital in unproductive physical assets. To address these structural issues, the Government of India launched two major initiatives in November 2015: the Gold Monetisation Scheme (GMS)—which revamped the earlier Gold Deposit Scheme of 1999—and the Sovereign Gold Bond (SGB) Scheme. These instruments mobilize idle household and institutional gold, convert passive physical holdings into productive financial capital, reduce import dependence, and offer financialized investment avenues tied to market prices.

Gold Monetisation Scheme (GMS)

Objectives and Framework

• Mobilizes idle gold held by households, religious institutions, corporate bodies, and trusts to put it into productive economic circulation.
• Reduces the nation’s reliance on gold imports to meet domestic demand, thereby mitigating CAD pressures.
• Replaced the earlier Gold Deposit Scheme (GDS 1999) and Gold Metal Loan (GML) framework to improve efficiency.

Operational Mechanism

• Deposit and Assaying: Investors deposit physical gold (jewelry, coins, or bullion) at Collection and Purity Testing Centres (CPTCs) or designated bank branches.
• Melting and Refinement: Deposited gold is melted, assayed for purity, and converted into standard raw gold bars.
• Gold Savings Account: Banks open a Gold Savings Account credited with the net weight of pure gold (999 fineness equivalent).

Categories of Deposits and Tenures

• Short-Term Bank Deposit (STBD): Tenure ranges from 1 to 3 years. Interest rates are determined by individual commercial banks based on market conditions. Both principal and interest are denominated in gold grams.
• Medium-Term Government Deposit (MTGD): Tenure ranges from 5 to 7 years. Central Government bears the liability; interest rates are fixed by the government.
• Long-Term Government Deposit (LTGD): Tenure ranges from 12 to 15 years. Managed on behalf of the Central Government with fixed interest payouts.

Utilization and Redemption

• Banks deploy mobilized gold for lending to domestic jewelers as Gold Metal Loans (GML), auctioning, or building Reserve Bank of India (RBI) gold reserves.
• Redemption Rules: STBD offers redemption in physical gold or cash equivalent. MTGD and LTGD redeem principal in equivalent gold or cash, while interest on medium and long-term deposits is paid in rupees.

Sovereign Gold Bond (SGB) Scheme

Objectives and Framework

• Introduced as a paper-based alternative to physical gold purchases, shifting domestic demand from physical metal to financial instruments.
• Issued by the Reserve Bank of India (RBI) on behalf of the Government of India, carrying a sovereign guarantee on principal and interest.

Key Features and Terms

• Denomination and Eligibility: Denominated in multiples of 1 gram of basic gold (999 purity). Subscription is open to resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.
• Investment Limits: Minimum investment is 1 gram. Maximum limit per fiscal year is 4 kg for individuals and HUFs, and 20 kg for trusts and similar institutions.
• Tenure and Exit: Overall tenure is 8 years. Premature redemption option is available after the 5th year on coupon payment dates.
• Yield: Yields a fixed interest rate (2.50% per annum on the initial investment amount for recent tranches), paid semi-annually.
• Pricing and Valuation: Issue and redemption prices are determined using the simple average closing price of 999 purity gold published by the India Bullion and Jewellers Association Limited (IBJA) for the preceding three working days.

Tax Implications and Recent Status

• Capital gains tax arising on final redemption of SGBs at maturity (after 8 years) is fully exempt for individual investors.
• Interest earned is taxable according to the investor’s applicable income tax slab.
• Issuance Status: Fresh issuances of Sovereign Gold Bonds were paused by the Government of India. Existing series remain active, earn scheduled interest, trade on stock exchanges, and qualify for premature redemption or maturity according to their original terms.

Comparison: Gold Monetisation Scheme vs. Sovereign Gold Bond Scheme

Key Facts for Quick Revision

• Both the Gold Monetisation Scheme and Sovereign Gold Bond Scheme were launched on November 5, 2015.
• India relies on imports for over 80 percent of its total domestic gold demand.
• The minimum deposit requirement for the Gold Monetisation Scheme was lowered from 30 grams to 10 grams to encourage broader household participation.
• Collection and Purity Testing Centres (CPTCs) must be certified by the Bureau of Indian Standards (BIS) to process gold under GMS.
• SGBs can be held in physical certificate form or dematerialized (demat) form for exchange trading.
• SGBs serve as eligible collateral for loans from commercial banks and financial institutions.
• India Bullion and Jewellers Association Limited (IBJA) acts as the official benchmark rate publisher for SGB issue and redemption valuations.
• Jewelers borrow raw gold mobilized through GMS from banks via the Gold Metal Loan (GML) mechanism.