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SBI Gold Deposit Scheme: As Good as Gold... or Better?

Usha Ravi

Those who invest in gold must surely share a love-hate relationship with it. For, while the yellow metal has been considered valuable, very safe, liquid, a great inflation hedge and good-looking for generations, it is also guilty of just lying in safes and vaults in lazy, yellow chunks, not earning a thing. Stocks soar when their time comes and rake in gains; bonds faithfully earn an interest but gold does precious little, really!

With SBI's Gold Deposit Scheme, it is this reputation of the yellow metal that is likely to change.

Here's what the scheme is all about:

What is SBI's Gold Deposit Scheme?

It is a gold-denominated deposit -- the depositor deposits gold that he owns instead of cash, for a fixed period of time. Such a deposit fetches him an interest over the tenure and also ensures safe storage of gold. On depositing the gold, the depositor receives an SBI Gold Deposit Certificate in the form of a receipt, which is transferable by endorsement and delivery.

What is the tenure of the deposit?

Gold can be deposited for a period of 3,4,5,6 or 7 years.

In what form can gold be deposited?

Gold can be deposited in any form -- as jewellery, coins, bullion, or biscuits. Jewellery with stones and gems are not accepted.

What is the minimum amount of deposit?

The minimum amount of deposit is 200 grams of gold.

Will the purity and weight of gold be tested before the deposit is accepted?

At the time the deposit is made, there will be a preliminary check of the purity of gold either by a local professional or with the help of a machine. The depositor can withdraw the deposit after the preliminary appraisal after paying an appraisal fee, if he is not satisfied with the verdict. Subsequently, there will be a final assaying carried out according to internationally accepted methods, when the gold will be melted to determine the purity and weight. The weight of pure gold determined in this manner will be entered in the certificate.

What is the rate of interest on the deposit?

Interest on the deposit is payable in cash either compounded over the tenure of the deposit or annually.

It will be calculated on the weight of the gold deposited (as mentioned in the Gold Deposit Certificate). For example, if 200 grams of gold is deposited for three years, interest payable at the end of the first year will be the value of 6 grams (3 pc of 200 grams) calculated based on the price of gold on that date.

The present interest rates are:

Tenure	Interest rate (p.a)
3	3 %
4	3.25 %
5	3.50 %
6	3.75 %
7	4 %

Is the interest on a gold deposit taxable?

The interest earned on the gold deposit is exempt from income tax. The value of the assets deposited is also exempt from wealth tax.

Is there an option to receive cash at the time of redemption?

At the time of redemption of principal at the end of the tenure, the depositor has the option of receiving cash or gold. If the depositor opts for redemption in cash, the amount will determined based on the price of gold on the date the payment is due (which will be determined considering the international price in US$; the rupee-$ exchange rate and the prevailing custom duty on the import of gold).

If repayment is accepted in gold, the depositor will be given 995/999 fineness (24 carat) gold in multiples of 10grams.

Is it possible to opt for premature redemption?

There is a one-year lock-in period for the gold deposit. After the completion of a year, the deposit may be redeemed prematurely but a penalty will be levied on the applicable interest rate.

What are the downsides in the investment?

The future value of gold, which even experts say is almost impossible to predict. Investors and traders do believe that there may be temporary dips in price as was experienced a few months ago, but in the long run gold will continue to remain strong and reliable as ever. Going by this, it does appear that investors have little to lose in this scheme -- if at all there is a fall in price, interest will help cover the loss. And, they do have to a little to gain -- a little interest and freedom from the worry of safekeeping! A lot, of course, depends upon the manner in which the scheme is implemented. What investors need to decide is whether they are willing to impose as much faith in the scheme as they have in gold itself.

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