The government is planning to issue sovereign bonds linked to the bullion price in an effort to divert some of the estimated 300 tonnes of annual demand for gold bars and coins and curb bullion imports, which can push up the trade deficit.
"The main idea is to reduce the demand for physical gold," according to the draft.
The country consumes nearly 1,000 tonnes of gold every year, most of it imported, and gold is the second-biggest expense on the import bill after oil.
To reduce overseas purchases of the precious metal, Finance Minister Arun Jaitley unveiled plans in February for a sovereign gold bond and a bullion deposit scheme.
While the deposit scheme aims to mobilise idle household gold, estimated at more than 20,000 tonnes, the sovereign bond would allow consumers to invest in 'paper' gold rather than physical gold.
The price of the bond would be linked to the price of gold and it would pay an interest rate linked to the international rate for gold borrowing.
For interest rates, "an indicative lower limit of 2 per cent may be given but the actual rate will have to be market-determined", the government proposal said.
The sovereign bonds would be issued in denominations of two, five and 10 grams of gold or other sizes for a minimum term of five to seven years and they could be used as collateral for loans, it said.
The government aims to issue bonds worth 135 billion rupees ($2.12 billion) or the equivalent of 50 tonnes of gold in the first year.
It invited the public to comment on the plans by July 2.
($1 = 63.6588 rupees)
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Alan Raybould)