Hi,
I have 400gms of jewellery which I intend to convert to SGB and pledge to get margin money. Could somebody please advice my options, its procedure and how long it will take. Also, please advice the risks associated with this plan.
Thanks.
You may try converting your physical gold into Gold Deposit Scheme in a bank where the bank collects your gold and keeps it on behalf of the Central Govt. and pays you interest similar to SGB.
Please contact your bank for more details.
2 Likes
Thanks @rupeshmandal. But I intend to get double benefit in terms of both interest from SGB as well as to improve my margin by pledging SGBs. I believe Gold Deposit Schemes cant be pledged.
i don’t know details about sgb. switching from physical gold to electronic is good, as you can easily sell it.
but my personal view on pledging is not positive.
our portfolio must have atleast 20% of gold, the % can be lower & more as per your profession, age, liability & according to many factors.
pledging can give some liquidity to fulfill the requirement in emergency.
For trading, fund raised by pleading can help good, only if you have better working strategy which gives atleast 40-60% return/year. otherwise if think it didn’t be great to pledge.
@ansar_bedhar dont sell your physical gold whatever you have now , for the purpose of trading you are doing this is the bad action you are taking - buy little in SGB mopnth on month after words you can pledge and do whatever you have dont do anything
you can’t directly convert your physical gold to SGB. RBI do not accept physical gold in lieu of SGB so option of converting is not possible.
Gold deposit scheme is one option if you want to make use of your physical gold and earn some interest. Otherwise you can sell your physical gold and use that money to buy SGB as two separate transaction (which will result in higher costs).
Thanks @eaglem and @TradeB2B for your kind advice and insights. I appreciate your concerns regarding allocating gold towards a high risk activity like trading. It made me reconsider my decision.
However, for future reference, during my research I came across various challenges that I would face if I chose to take this idea forward. Following are those:
- Wastage Charges charged by jewellers when you sell your jewellery. This usually is 2% to 4% of your gold value.
- Capital gains tax on jewellery sold.
- Difference in SGB price and current market price of gold (This could sometimes go in our favour too.)
- Notional loss on making charges should you require to convert SGB back to gold.
All these being said, assuming making charges of 15% you can very well recoup all the above losses in about 8 years (I didn’t consider capital gains tax), from the 2.5% interest SGB delivers annually.
NB: Capital gains tax is individual dependent (can be 0 too).
Thanks,
AB
1 Like
Thanks @Akash_Shah.
Being a new user I am limited to tag only 2 users in one post. Please see above post for my view on our topic.
Thanks again,
AB
wastage charges are minimum 15% in my area on valid bill (is also printed on bill),
in addition to this, 2% min diff in buying & selling rate of jwellers.
making charges are really bad, so for investment purpose better to having bars or egold.
capital gain tax & price diff in SGB & CMP is no solution.
@ansar_bedhar I am now actually confused about your purpose of doing this comparison
What exactly is the purpose of jewelry you are holding. Is it:
- Is it for consumption or wearing - then there is not point of conversion. you need to keep as it is. As SGB can’t be worn. So comparison is meaningless.
- Is it old jewelry which is of no use right now but you intend to hold long term and convert it in future for new jewelry (for wedding or so) - in that case your argument about wastage and notional loss is irrelevant because that is anyways going to happen whenever you make new jewelry from old
- If it is purely investment, then keeping it as is makes no sense. SGB is much better for investment purpose.
Also, SGB if held till maturity has no capital gains tax. Which is big plus.
Finally it depending on purpose and intended duration of gold holding you need to decide which form works best for you.
On trading part I can only say that there is a lag from the time SGB lists to it become acceptable as collateral. Sometimes it is more than couple of months. So don’t assume you will buy SGB today and can start using it as collateral from tomorrow. you might have to wait 3-6 months.
This is not possible as of now but as per a notification on 9th Feburary 2021 by the Ministry of Finance, they are going to allow Dematerialisation of MTGD & LTGD Deposit Certificates and make them tradable & transferable like SGBs. Referencing the section which talks about this in that Notification below -
b. Dematerialisation of MTGD and LTGD Deposit Certificates to make them tradeable and Mortgageable
(i) In the first stage, issue of MTGD and LTGD Deposit Certificates by banks will be moved to a secure digital platform, to be developed by State Bank of India on behalf of Government of India. Banks will also dematerialise STBD certificates issued by them.
(ii) Thereafter, a regulated securities depository will be designated by SBI to hold R-GDS certificates in digital demat form.
(iii) Accordingly, R-GDS deposit certificates shall be made tradable and transferable like SGBs to make R-GDS an investor friendly product.
(iv) Banks will be permitted to provide loans against MTGD and LTGD certificates.
It might become possible to pledge Gold Deposit Scheme certificates in the future but that will likely take some time.
@Akash_Shah My purpose was to make the most out of the gold jewellery while maintaining its role as an inflation hedge in my portfolio. I completely agree with your views. Only problem I am facing now is the capital gains tax that I will incur if I choose to covert my jewellery to SGBs.
R-GDS might address capital gains issue.
Thanks,
AB
@Prayag Thanks for the heads up. Would be great if it helps bypass the capital gains taxation.
1 Like
As per the page on the Department of Economic Affairs website -
Tax implications on GMS (Gold Monetisation Scheme) shall be notified by the Central Government from time to time. However, it is clarified that Tax exemption, same as those available under GDS (Gold Deposit Scheme), would be made available to the customers, in the revamped GDS (Gold Deposit Scheme), as applicable. In this direction, the enabling notifications issued by GOI are:
(a) Exemption of interest earned on gold deposit bonds from Income Tax vide amendment to section 10(15)(vi) of the Income Tax Act by Finance Act 1999. Exemption of various assets deposited in the scheme from Wealth Tax under Section 2(ea) of Wealth Tax Act as amended by Finance Act 1999.
(b) Exemption from capital gains made on the bonds though trading or at redemption from Capital Gains Tax under section 2(14)(vi) of Income Tax Act as amended by finance Act 1999.
