Inflation Indexed Bonds (IINSS-C)
This is the latest product launched by RBI in an effort to wean retail investors away from physical assets to financial assets. Since inflation has been a record high in the recent 5 years, Indian investors have been shifting to gold and real estate to protect their savings from inflation. This has dented our current account deficit quite significantly in the last two fiscals. Inflation Indexed National Savings Scheme - Cumulative (IINSS-C) is an alternative to physical assets (gold & property) to motivate retail investors to save in an asset that provides "real rate of returns", one that does not get eroded by inflation.
How does it work?
Typically a fixed interest is paid on a bond (called coupon). A Rs.1000 bond that pays 8% interest p.a looks good but if inflation (as measured by CPI) is 10%, your real rate of return is negative. In the case of IINSS-C, the interest is the sum of a fixed interest (1.5%) and CPI (consumer price index) of the preceding 3 months, compounded half-yearly. This ensures that you always get 1.5% over and above the inflation rate, effectively making your real return positive. Investors can invest through one of the agency banks (eg.SBI, nationalized banks, HDFC Bank, ICICI Bank and Axis Bank) or through the Stock Holding Corporation of India (SHCIL).
Features
How does it work?
Typically a fixed interest is paid on a bond (called coupon). A Rs.1000 bond that pays 8% interest p.a looks good but if inflation (as measured by CPI) is 10%, your real rate of return is negative. In the case of IINSS-C, the interest is the sum of a fixed interest (1.5%) and CPI (consumer price index) of the preceding 3 months, compounded half-yearly. This ensures that you always get 1.5% over and above the inflation rate, effectively making your real return positive. Investors can invest through one of the agency banks (eg.SBI, nationalized banks, HDFC Bank, ICICI Bank and Axis Bank) or through the Stock Holding Corporation of India (SHCIL).
Features
- Minimum investment is Rs.5000 and max is Rs.5Lacs
- Bonds are cumulative and not redeemable until 10 years
- Not tradable in secondary market
- Interest is taxable per your "marginal rates"
- TDS applies as these are unlisted securities
- Held by RBI in a central depository
- Pre-mature withdrawal attracts a 50% penalty on the last interest paid
- Senior citizens (>65yrs) can withdraw after 1 year and others after 3 years
- NRIs not allowed to invest
Is it suitable to you?
Although IINSS-C is designed to beat inflation and offer real positive returns to the retail investor, the taxability aspect is a party popper. The tax on interest eats into the real positive returns thereby defeating the intent of the instrument. That said, this bond is most favorable to those that fall in the 10% tax bracket. As for the rest, unless the government withdraws the tax, you are better off with other alternatives available such as PPF and tax-free bonds.
Although IINSS-C is designed to beat inflation and offer real positive returns to the retail investor, the taxability aspect is a party popper. The tax on interest eats into the real positive returns thereby defeating the intent of the instrument. That said, this bond is most favorable to those that fall in the 10% tax bracket. As for the rest, unless the government withdraws the tax, you are better off with other alternatives available such as PPF and tax-free bonds.
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