Retail inflation bonds: top 10 things to know - NDTV

NDTV | Updated On: December 20, 2013 14:29 (IST)

The new savings bonds that offer interest rate linked to consumer inflation will open for subscription on December 23, 2013 and close on December 31, 2013. The subscription of these bonds called Inflation Indexed National Savings Securities-Cumulative, or IINSS-C, can however be closed earlier than schedule. The interest rate on these bonds is pegged to consumer price inflation (CPI) index and is meant to protect savings from inflation and lure households to invest in financial products, instead

Here are the salient features of these bonds:

• Eligibility for investment: The bonds can be held by a resident individual in individual capacity or joint basis, or on behalf of a minor as father/mother/legal guardian. Non-resident Indians are not allowed to invest in these bonds.

• Investment limit: The minimum limit for investment in the bonds is Rs 5,000 and maximum limit for investment is Rs 5,00,000 per applicant per annum.

• Issue price and how to subscribe: The bonds will be issued at par, which means the issue price will be Rs 5,000 or in multiples thereof. These bonds would be sold through authorised banks and the payment mode could be in the form of cash/drafts/cheques/online.

• Interest rate: It consists of two parts: a fixed component of 1.5 per cent and a variable one based retail inflation based on consumer price index or CPI. In other words, the interest will be 1.5 per cent above the consumer inflation rate. The interest will be compounded half yearly. The CPI data to be would be used with a three-month lag for calculating inflation. For example, the CPI for September would be used as reference CPI for all days of December.

• Tenor and repayment: The maturity of the bonds will be 10 years and the interest gets paid out only at maturity. The bonds shall be repayable on the expiration of 10 years from the date of issue.

• Tradability: The bonds shall not be tradable in the secondary market.

• Loan against these bonds: The bonds shall be eligible as collateral for loan from banks, financial Institutions and non-banking financial company.

• Early redemption: These bonds can be redeemed after one year of holding from the date of issue for senior citizens after three years of holding, subject to the penalty charges at the rate of 50 per cent of the last coupon payable.

• Tax treatment : The interest on the bonds will be taxable under the Income-Tax Act, 1961 as applicable according to the relevant tax status of the bonds holder. In other words, the interest income would be added to the total income of the bondholder and taxed at the applicable slab.

• Retail inflation bonds vs others fixed income instruments: You should closely look at the tax angle before you decide to invest in retail inflation bonds. Though consumer inflation levels are at high levels now, the post-tax return would be lower. The interest earned from tax-free bonds and PPF are not taxed though they offer lower rates.

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