By Deepa Gopalan
ET Intelligence Group

Your gold can be deposited in some banks, where it stays secure, enjoys its natural price appreciation and earns interest too

HAVE you ever wondered how you could make some money from gold lying idle in your bank locker? Another thought: Is it better to put the gold in some gold deposit scheme or just hold it as an asset?

Several nationalised banks offer gold deposit schemes that are monitored by the Reserve Bank of India. A person can open a gold deposit account with any bank that offers the service. A minimum deposit of 200 gms must be kept, which translates into an investment of over a lakh of rupees (Rs 106,060 at the average price during 2002-2003). The tenure varies from three to seven years. Currently the interest rate is 1.25 per cent per annum for all maturities.

This is compound interest and calculated every year as a percentage of the price of gold (plus previously declared interest) as on the date of declaration of interest. You can either take the interest on March 31 every year or compound it annually for payment at the time of maturity. Interest-bearing certificates will be issued to you as and when interest accrues.

On maturity, you can redeem these certificates along with the initial deposits in gold bars or equivalent rupees. The price of gold on the date of maturity will be applicable if you wish to redeem your deposit in the form of cash. Another plus point of this scheme is that there will be no capital gains tax or income tax on the gains.

But there is also a flip side that needs to be looked at. At the time of accepting the jewellery deposit, the bank will test the purity and issue the certificate based on the exact gold content. Thereafter, the bank will melt this jewellery and refine it to pure gold bars. In addition to losing the form of jewellery, the depositor will have to bear the cost of testing the purity and the cost of refining.

This scheme does not permit a premature withdrawal until one year of keeping the deposit. In case you must withdraw after a year but before the due date, expect a one per cent cut in the interest rate. That means, instead of getting interest at the rate of 1.25 per cent, you will get only 0.25 per cent.

Now let us see how this compares with just keeping gold in that safe deposit locker. Let’s take a scene where a person had 200 gms of gold in the form of bars as on January 1, 2000 (valued at Rs 87,860). Suppose she held it until December 2002, the value would have increased to Rs 91,040. Thus, she would have gained Rs 3,180. This, however, is applicable only in the case of gold bars.

Suppose she kept the gold bars in a deposit scheme in January 2000. At the end of three years, the interest accrued would be Rs 3,382. Apart from this interest, she would also have gained from appreciation in the price of gold of Rs 3,180 — netting a total gain of Rs 6,562. The situation will be different had she deposited gold jewellery. Only the pure gold portion of the jewellery would be accepted as deposit. Any value addition in the form of design or making will be lost. Also, because of conversion, the aesthetic value of the jewellery is lost forever.

One important distinction that needs to be made is that if the gold is held in its natural form, you would be able to take advantage of any sudden rise in the price of gold. By keeping the gold in the deposit, there would be a lock-in.

Thus if the price of gold rises suddenly, you would not be able to capitalise on the increase by selling part of the gold. If you decide to withdraw prematurely, charges would be deducted, thus eroding part of the gains that might arise on sale of gold.

Another option in the case of gold deposits as, if you are in need of funds, you could opt for loans against these deposits. All you need to do is present the deposit certificate and avail of the loan.

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