Gold prices spurted by Rs 315 to trade at Rs 31,250 per 10 grams in Delhi immediately after government increased import duty on the metal to 6%.
In the afternoon, gold prices were trading at Rs. 30,935 per 10 grams. Rates shot up after the government announced a hike in the duty in the evening, traders said.
"Prices have increased by over Rs. 300 per 10 gram after the import duty hike," All India Sarafa Association Vice President S K Jain said.
The price of 99.9 and 99.5% purity of gold is now Rs. 31,250 and Rs. 31,050 per 10 gram, respectively, against Saturday's price of Rs. 30,910 per 10 grams and Rs. 30,710 per 10 grams, he added.
Jain said sales, however, have not been impacted by sudden rise in prices.
The government increased the import duty on gold and platinum to 6 per cent, from 4% earlier, with immediate effect - a move aimed at curbing imports of the precious metals to check the widening current account deficit.
"Government has decided to increase import duty on gold and platinum from 4% to 6% with immediate effect," department of economic affairs secretary Arvind Mayaram told reporters.
He further said the government will link Gold Exchange Traded Fund (ETF) with gold deposit scheme, which will enable mutual funds to unlock their physical gold and invest in gold-linked schemes offered by banks.
"The changes proposed to the Gold deposit scheme will make it attractive for individuals to deposit their idle gold with the banks under the Gold deposit scheme," Mayaram said.
He said the changes would help moderate import of gold and help in bridging the current account deficit (CAD).
Gold imports in 2011-12 amounted to $56.5 billion and in the current financial year, till December, they are estimated at USD 38 billion.
Mayaram further said that the government will effect consequential changes in the additional customs duty and excise duty on gold dore bars, gold ores and refined gold.
"The duties will be reviewed after sometime if there is a moderation in the quantity of gold that is imported into the country," he said.
Gold was trading at Rs. 30,935 per 10 grams on Monday.
The move to link Gold ETF with deposit schemes will help increase physical availability of gold in the market, as a part of the gold lying in stock will be brought into circulation meeting the demand of gems and jewellery trade.
"Consequently, there will be a moderation in the quantity of gold that is imported into the country," Mayaram said.
He said the minimum quantity of gold that may be deposited into the Gold deposit scheme would be reduced and the minimum tenure would be brought down to six months, from the present three years.
Market regulator Sebi and the Reserve Bank will come out with notifications on Gold ETF and gold deposit schemes in two to three weeks.
Gold ETF is provided by Mutual Funds (MF), in which the units are backed by physical gold held by the MFs. Gold deposit schemes are offered by a number of banks, in which gold deposited by client is lent by the banks to the gems and jewellery trade.
The announcement, which follows concerns expressed by finance minister P Chidambaram over rising imports of gold, comes nearly a month before the Union Budget on February 28.
Traditionally, India has been the world's largest consumer and importer of gold.
Outflow of the foreign exchange on gold imports is impacting country's CAD, which has widened to USD 38.7 billion or 4.6% of the GDP in the first half of the current fiscal.