Should you invest in Retail Inflation Indexed Bonds?
Reserve Bank of India is going to issue Inflation Indexed National Savings Securities-Cumulative (IINSS-C), or inflation indexed bonds, for subscription from December 23 to on or before December 31, 2013 for retail investors. The coupon rate of interest rate on these bonds will be accorded to consumer price inflation (CPI) index, thus protecting savings from price rise. These bonds are designed to wean Indians away from investment in gold.
Here are Salient Features of IINSS-C
1. Who can subscribe?
Only Indian citizens either in individual capacity or joint basis, HUF, Charitable Institutions and Universities can subscribe to these bonds. They can be bought on behalf of a minor.
Non-resident Indians are not allowed to invest in these bonds but they can become nominee.
2. Minimum and Maximum Investment?
Minimum investment is of Rs.5,000 which is also the face value while maximum investment is Rs.5,00,000 (i.e. in multiples of Rs.5,000).
3. How to subscribe?
These bonds will be distributed or sold through authorized banks like State Bank of India and its branches, HDFC Bank, ICICI Bank, and Axis Bank. Payment could be made in the form of cash/drafts/cheques/online through internet banking.
4. What is coupon rate or interest rate?
Interest rate is divided into two parts: Fixed and variable. Fixed part is 1.5% per annum (or .75% half annual) and variable part depends on retail inflation rate. So, if retail inflation rate is 10 per cent, subscribers can get 11.5 per cent per annum.
Interest will be compounded half yearly which enhances the effective yield on investments. Also keep in mind that 1.5 percent is guaranteed even if there is deflation.
The CPI data will be used with a three-month lag for calculating inflation. So, CPI for September will be used as reference CPI for all days of December.
5. Tax Treatment of the bonds?
The interest on the bonds will be taxable. The interest will be added under the head “Income from Other Sources” and taxed as per the tax slab.
For instance with 10% CPI inflation the return on would be 11.5% per annum (10 + 1.5) but post tax return would be
- 10.43 per cent for 10 per cent tax bracket
- 9.54 per cent in the 20 per cent tax bracket, and;
- 8.79 per cent in the 30 per cent tax bracket
TDS shall not be deducted on the interest received.
6. Tenor and Repayment?
The investment horizon of the bonds will be 10 years and the interest will be paid out at maturity only.
Senior citizens (i.e.65 years and above of age) can redeem after one year of holding; others will have to wait for atleast three years for early redemption and will have to pay penalty at the rate of 50 per cent of the last coupon rate payable. Also Early redemption can be made only on coupon dates.
7. Pledge for Loan?
The bonds can be pledged as collateral for loan from banks, financial institutions and non-banking financial company.
8. Are these Tradable?
Since No Demat Option is there, these bonds shall not be tradable in the secondary market.
9. Should you subscribe?
The tax treatment of these bonds makes them less attractive as compare to tax-free bonds and PPF investments. Besides, these bonds will loose their attractiveness when retail inflation rate comes down (which Government is trying desperately).
Recommended Read: Why to Invest in Tax-Free Bonds?
Reference: RBI on Inflation Indexed National Savings Securities- Cumulative, 2013.