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Capital gains tax relief on gold bonds likely; proposal may be taken up in the next budget
September, 10th 2015

Indians looking to invest in gold bonds may be able to enjoy exemption from capital gains tax as the proposal is expected to be taken up in the next budget, the government said after it unveiled the details of the proposed gold bond and gold monetisation schemes.

"The department of revenue has said that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption at the time of redemption," Economic Affairs Secretary Shaktikanta Das told reporters, after the Cabinet approved the twin schemes that seek to reduce the country's massive gold imports. Indexation benefit refers to paying tax only on real gains after adjusting for inflation. The gold monetisation scheme will allow the government to tap into an estimated 20,000 tonnes of yellow metal lying in Indian households and bring into the banking system, boosting domestic supply.

India imports nearly 1,000 tonnes of gold every year, which weighs heavily on country's external account. In 2014-15, India imported nearly $35 billion worth of gold. The sovereign gold bond scheme is expected to moderate investment demand for physical gold, by allowing investors to capture equivalent gains through financial means.

Gold depositors would face regular know-your-customer rules as the government does not want the scheme to turn into a laundering conduit. "We do not want to allow gold monetisation scheme to become a vehicle for converting any unaccounted wealth to white," Das said.

Capital gains tax relief on gold bonds likely; proposal may be taken up in the next budget

The scheme allows gold deposits for one year to 15 years. While the deposits will earn an interest, the redemption will be at the prevailing value, in cash or gold itself. Sovereign gold bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment. However, there will be a cap of 500 grams that a person can purchase in a year. Such bonds will be offered to only Indian citizens and institutions. The securities will be traded on exchanges, allowing investors to monetize their investment as and when they want.

The scheme is expected to help reduce demand for gold bought as investment. Indian purchase an estimated 300 tonnes of gold bars and coins every year for investment and the government hopes at least a part of this will shift to gold bonds.
The issuance of the sovereign gold bonds will be within the government's market borrowing programme. The actual amount of issuance will be determined by the central bank, in consultation with the finance ministry. The risk of gold price changes will be borne by the Gold Reserve Fund that is being created. The benefit to the government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund.

"It is safer and economically more stable to go under both these schemes," Finance Minister Arun Jaitley said while briefing reporters about that decision of the Cabinet, which is a followup of an announcement made by him in the budget for 2015-16.

"These schemes will be launched very soon," Das said, adding that they were different from earlier schemes in the sense that deposits will be denominated in gold instead of money. On the monetisation scheme, banks will be allowed to sell the gold deposited with them to jewellers to boost domestic supply and cut reliance on imports. The gold monetisation scheme provides for incentives to banks. Individuals and institutions can deposit as low as 30 gm of gold. The rate of interest on these schemes will be fixed in consultation with the Reserve Bank of India. Das also said the government would launch sovereign gold coins by early next month.

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