Will EGR work where the Gold Deposit Scheme failed to shine?

India’s gold reserves strewn across households and bank lockers have been a subject of intense speculation at par with how much exactly the US government hoards the yellow metal in its fabled Fort Knox. Indian households may have accumulated up to 25,000 tonne of gold, thereby retaining the tag of the world’s largest holders of the metal, according to the World Gold Council (WGC). That was in 2019.

The same report put the treasure trove in perspective — its value constitutes roughly 40% of India’s GDP. If monetised, it could, to a large extent, ease the financial pressure the nation faces. Indeed, India is serendipitously sitting on a treasure trove. Together with real estate, gold has been the parking ground for money, a substantial bit of it black, in the country.

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Since transactions in gold often take place outside the mainstream economy, no authentic figure is available about India’s true worth of gold reserves. But the WGC estimate can be taken as a fair assessment given the fact that the typical Indian parent accumulates gold from early on in anticipation of his or her daughter’s marriage. Gold is also seen as a safe-haven investment in most Indian households — a thinking shared by investors the world over.

Where GDS falls short

The Centre is aware of the immense potential the idle wealth strewn across the country has, which is why it has been operating the Gold Deposit Scheme (GDS) through State Bank of India. But the scheme hasn’t caught the fancy of citizens due to the in-built repellant — jewels have to be melted by designated smelters before the SBI can give receipts for the gold deposits. On maturity, the investors get either gold bullion or cash equivalent thereof, and not the jewellery.

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The deposits earn interest ranging from 0.50% for short (1-3 years) to 2.25% for medium (5-7 years) and 2.5% for long-duration (12-15 years) tenures, thus being the gravitas for morphing what seems an unproductive asset into a productive one. The gold held by SBI enters the market, thus adding to the supply of gold and applying brakes on imports.

The rationale behind the scheme is sound but it has not found too many takers, with temples alone evincing significant interest in it by and large. Tirupati, with an enormous stockpile of gold obtained through offerings by devotees, Mata Vaishno Devi Trust and Shirdi Sai Baba trusts have been using the scheme to a large extent, enticed by the interest income. For instance, in a white paper released recently, the Tirumala Tirupati Devasthanams trust said that it has 10.3 tonne of gold deposits.

Temples neither mind the melting sentimentally nor fear the taxman as they are in any case exempt from income tax. The common man is wary of both.

EGR vs GDS vs gold loans

It is against this backdrop that the Securities and Exchange Board of India (SEBI) stepped in recently with the Electronic Gold Receipts (EGR) scheme. Vis-à-vis the measly interest offered under the GDS, the EGR would fetch the gold owners capital gains, which theoretically can be several times more than interest.

EGR, like GDS, poses a lack of option around gold melting. In fact, it is for this reason that gold loan schemes of both banks and NBFCs have become popular — they allow people to temporarily monetise their gold while their jewels are left untouched. Gold loan companies and banks simply hold the jewellery (or coins, biscuits and so on) as collateral. It has been a good business by and large because gold as collateral has enjoyed widespread acceptability despite fluctuating bullion rates.

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However, while gold loans are just debt products, EGR and GDS are investment instruments that offer returns. GDS offers fixed interest (as described earlier), while EGRs are similar to stocks and could potentially offer higher returns. All that the investor has to do is deposit physical gold in a vault at a designated delivery centre. The vault manager issues an EGR, which is credited to the investors’ demat account. The EGR can then be traded on the stock exchange. Similarly, investors can buy gold via EGR through their Demat accounts; they can then keep it as is or convert it to physical gold.

The Bombay Stock Exchange (BSE) launched EGR trading on its platform during Diwali, and has already attracted around 100 depositors to the scheme. The National Stock Exchange is looking to launch EGRs shortly. Apart from individual investors, jewellers and institutions can also invest in EGRs. For investors looking to sell their gilded assets, EGRs are a definite plus, for they can expect hassle-free transactions and fair prices.

The tax equation

While GDS interests are low, the earnings are exempted from capital gains tax, wealth tax and income tax.

EGRs, which could earn higher returns since they are traded on exchanges, are taxed as security under the Securities Contract Act, and subjected to Securities Transaction Tax. GST is levied when investors convert their EGRs to physical gold.

The biggest advantage of EGRs lies in its liquidity. Investors can monetise their gold assets and take the gold back at any point. Also, it is safer than holding the gold at home or even in bank lockers. It is to be noted, however, that EGR holders bear the storage charges.

How it helps the nation

EGR offers investors an option to serve the economy as well. The gold surrendered under the scheme could obviate the need for import of gold pro tanto involving outgo of precious foreign exchange. In fiscal 2021-22, India imported a record 3.4 trillion rupees worth of the yellow metal — scaling this down will be of big help to the national coffers.

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It is here that EGR and GDS score well above gold loans. The RBI mandate to public sector banks is to sanction only 72% of the value as loan as a measure of abundant caution to guard against possible erosion in collaterals. Still, gold loans have come handy in emergencies and found to be much cheaper than personal loans of banks.

But gold loans cannot be termed gold monetisation, as the pledged gold does not enter into gold trade nor ease the pressure on import of the yellow metal. However, to the extent they are shifted from personal lockers to gold loan company lockers, they do perform the function of conferring liquidity on its holders.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)