Update Date : 17-Dec-2024

Created Date : 06-Nov-2022

Reference : ET Wealth

Online digital gold platform SafeGold has launched a service called Gains that customers can use to lease their digital gold and get some returns. The metal will be taken from the vault, where customers store digital gold, and leased to small jewellers.
 
Let us understand how leasing digital gold works and the risks that are associated with it.
 
 
WHAT IS LEASING OF DIGITAL GOLD?
 
According to SafeGold, "Gains is peer-to-peer lending where a customer can themselves choose the jeweller and tenure of the lease. The yield offered by the jeweller will be on the basis of the tenure chosen by the customer. The MSME jewellers mentioned on the website (of SafeGold) have been verified for creditworthiness and KYC-compliant."
 
An individual can lease a minimum of 0.5 grams and a maximum of 20 grams of digital gold under the scheme. The lease can be done for 30 days to 364 days. Gaurav Mathur, Founder & MD of the platform, says, "However, most leases are between 90 and 180 days. A customer can expect a yield of 3-6% per annum. The yield will be calculated on a daily basis and added to the customer's digital gold account on a monthly basis. The earned yield will be in the form of gold. Hence, once the lease expires, the original gold leased and the yield earned in the form of gold will be added to the customer's account."
 
SafeGold reiterates that leasing digital gold does not assure a person of any returns in rupee terms.
Mathur explains this with an example. Suppose a customer leases 10 grams of gold to a jeweller for three months at a yield of 3% per annum. The customer will get 75 milligrams of gold as lease rental income over 3 months (300 mg for the year divided by four, for one quarter).
 
The customer will get a monthly statement providing information on the yield added to the digital gold account.
 
 
WHAT ARE THE RISKS INVOLVED?
 
SafeGold website lists five risks associated with the leasing of digital gold.
 
• Unregulated product: SafeGold says digital gold leasing is an unregulated product. This would mean that in case of any loss or fraud, a customer may not be able to seek redressal from a regulatory body like the Securities and Exchange Board of India or the Reserve Bank of India.
 
• Liquidity risk: Once the gold is leased by the individual to a jeweller, she cannot sell it before the lease expires. The digital gold is locked in for the period. Customers cannot cancel the lease before its expiry. However, the jewellers can cancel a lease early. If a jeweller does that, then the leased gold and the yield earned till the day the lease is closed (in gold) will be added to the customer's digital gold account.
 
• Risk of loss of capital: A customer can lose her leased digital gold in case the jeweller does not return it at the end of the tenure. However, SafeGold claims to have taken steps to protect customers' interests. Mathur says, "We have taken bank guarantees from the jewellers' listed on the platform. The value of the bank guarantee is higher than the value of the gold leased. Typically, we take a bank guarantee of 105-110% of the gold leased. Further, if gold prices rise, then additional bank guarantees will be taken to ensure that the guarantees are always higher than the value of the leased digital gold."
 
• Price risk: Apart from liquidity risk, there is a price risk too. The yield is earned in grams of gold. If the price of gold falls, the rupee value of gold will also fall. For example, on the date of starting the lease, the price of gold was Rs 100. However, after one month, the price falls to Rs 90. The rupee value of the leased digital gold will also fall. However, due to the lock-in clause, the customer will not be able to sell the gold and lower her losses expecting a future fall in gold prices.
 
• No Guarantee: SafeGold does not offer any guarantee on the protection of capital or returns.
 
 
 
WHAT IS THE TAXATION OF RETURNS FROM DIGITAL GOLD?
 
The returns on digital gold leasing do not come under tax deducted at source (TDS) obligations. According to SafeGold, "One needs to consult a tax expert to calculate the taxes payable on returns earned on leased digital gold."
 
 
 
SHOULD YOU GO FOR IT?
 
According to SafeGold, this is the first time such a product is being offered. The government had introduced a Gold Monetisation Scheme (GMS) in 2015. The objective of the scheme was to mobilize gold held by households and institutions and facilitate its use for productive purposes, and in the long run, reduce the country's reliance on gold imports. However, the response to this scheme was lukewarm because individuals were required to give their gold jewellery to banks on lease. The banks would lease it to jewellers and once the lease expires, it would be returned in the form of bullion or coins. The GMS scheme is currently offering 2.25 % per annum on a medium deposit of 5-7 years and 2.50% on a long-term deposit of 12-15 years, as per the RBI website.
 
Should a person go in for leasing of digital gold - given that digital gold is not in their possession anyway? If an individual has a complete understanding of the risks involved and is willing to take those risks on accumulated digital gold, then leasing can be a good way to earn some return. However, if a person does not have a risk appetite, then it would be better to leave the accumulated gold in the digital account.
 
Investors also have the option to invest in Sovereign Gold Bonds (SGBs) issued by the Government of India. They earn nominal risk-free interest of 2.50% per annum. As far as capital appreciation is concerned, the maturity amount is calculated on the prevailing prices. The scheme has a lock-in period of 8 years but investors have an option of prematurely exiting after 5 years.

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