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Inflation indexed Bonds are being launched by Government of India through RBI from 23 Dec to 31-December-2013 issued for the bond is as follows. The subscription can be closed earlier than December 31, 2013 with prior notice.

RBI Inlfation indexed Bonds advertisment

RBI Inflation Indexed Bonds advertisement

What are bonds?

A bond is an interest-bearing investment in which the issuer has to pay the bondholder a specified sum of money at specific intervals (known as a coupon), and to repay the principal amount of the loan at maturity. Zero-coupon bonds pay both the imputed interest and the principal at maturity. For example, say you buy a bond with a face value of  Rs 1,000, a coupon of 8%, and a maturity of 10 years. This means you’ll receive a total of  Rs 80 (1,000 * 8%) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, you’ll receive two payments of Rs 40 a year for 10 years. When the bond matures after a decade, you’ll get your 1,000 back.

What are Inflation Indexed National Saving Securities (IINSS-C)?

Inflation Indexed National Securities Cumulative are investment product where the principal is indexed to inflation. These instruments are specifically designed to cut the inflation risk.

Why is Govt. of India introducing these bonds?

Traditionally, gold is considered the safest investment option : a liquid asset which promised better returns than most instruments. As India’s policies started faltering, investors started flocking to gold. This gold rush has added to India’s burgeoning current account deficit (CAD).  Now, to wean Indians away from investing in gold and to restore investor confidence, the government has introduced inflation-indexed bonds.

What is the interest rate on these securities?

Interest rate will be 1.5 per cent annually(or .75% half annual) above the consumer or retail inflation rate.  So it means there will be two parts in the interest rate. One, fixed rate of 1.5% per annum and second, inflation rate. So, if retail inflation is 10 per cent, subscribers can get 11.5 per cent. Inflation rate will be based on the final combined Consumer Price Index [(CPI) base: 2010=100]. 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. We shall see it with example

Example of Interest rate calculation on these securities?

Year 0 on 25 Dec 2013 when you purchased 5000 Rs worth of bonds CPI is 150.

25 Jun 2014, After half year

  • Let’s say the CPI index is now 160.
  • So Inflation rate is (160-150/150) * 100 = (10/150) * 100 = 6.67
  • So Interest at half year would be .75% more than inflation rate hence inflation rate becomes 6.67 + .75 = 7.4.
  • So now principal = issue time principal + principal * (interest rate) = 5000 +  5000 * 7.4% = 5000 + 370.81 = 5371 (rounded off)

25 Dec 2014 after another half year

  • CPI is 166.
  • So inflation rate = ((166-160)/166) * 100 = (6/160) * 100 = 3.75%
  • So interest rate will be = .75 + 3.75% = 4.5%
  • So Principal = 4.5% of 5371 + 5371 = 241.70 + 5371 = 5613 Rs

25 Dec 2015 after another half year

  • CPI is 175.
  • So inflation rate = ((175-166)/166) * 100 = (9/166) * 100 =5.42%
  • So interest rate will be = .75 + 5.42% = 6.2%
  • So Principal = 6.2% of 5371 + 5371 = 346. 42+ 5613= 5969 Rs (rounded off)

 But what happens if there is decrease in inflation. So on 25 Dec 2014 CPI is 160 the interest rate will be fixed to .75% for half year

  • CPI is 160.
  • So inflation rate = ((160-166)/166) * 100 = (-6/166) * 100 = -3.61%
  • So interest rate will be = .75  = .75%
  • So Principal =.75 % of 5613 + 5371 = 42.53 + 5613 = 5655 Rs

Images below show the interest rate calculation with fixed interest of 1.5% per year or .75% half year in two different scenarios Ex 1 of continuous increase of CPI Ex 2 of increase and decrease in CPI

IINSS example of interest calculation

IINSS example of interest calculation

How has been the inflation (CPI) Changed in recent years?

Average CPI inflation over the years is shown in image below. For information on figures click here or go toinflation.eu 

Inflation India(CPI) over time

Inflation India(CPI) over time

When do I get interest?

Interest will be accrued and compounded in the principal on half-yearly basis and paid along with principal at the time of redemption. The maturity of the bonds will be 10 years and the interest will be paid out only at maturity. Senior citizens can redeem after one year of holding; others will have to hold for three years for early redemption and will have to pay penalty at the rate of 50 per cent of the last coupon payable.

 How do I redeem these securities?

  • In case of redemption prematurely before the maturity date, investors can approach the concerned bank few days before the coupon date and apply.
  • In case of redemption on maturity, the investor will be advised one month before maturity regarding the ensuing maturity of the bond advising them to provide a Letter of Acquaintance, confirming the NEFT account details, etc. If everything is in order the investor has to be paid within maximum five days of the maturity (to take care of any payment in the form of physical instrument).

What is Tax treatment of the bonds?

The interest on the bonds will be taxable as interest income under the head Income from Other Sources, and not as capital gains, even though the entire amount is received on maturity. The accumulated interest would be taxable each year, unless the investor chooses to account for such interest on a receipt basis, in which case, the entire interest would be taxable in the year of maturity when the interest is received. In either case, it would be subject to the income tax slab rate applicable to the investor.

For example: If the inflation rate is 10% and the interest income is Rs 575 on Rs 5,000 (the face value), an investor falling in the 30% tax bracket would pay tax of Rs. 177.68 (30.90%). So, the net interest income  becomes Rs.397.32. This amount is 7.94% of the invested amount; a rate below the inflation rate of 10%.

Will there be  Tax deducted at Source (TDS)?

Existing taxation applicable to Government of India securities will be applicable to these securities. TDS shall not be deducted from any interest payable on IINSS-C.

When will customers be issued securities?

The customers should be issued the securities after receiving clear money. After receiving clear money, banks should register the customer on CBS and generate Certificate of Holding.

Should you subscribe

The tax treatment of these bonds make them unattractive compared to tax-free bonds (which have been issued by government institutions like NTPC, IIFL and Hudco) and PPF investments, which are not taxed. Besides, these bonds will lose their attractiveness when retail inflation comes down. If inflation eases to 6 or 7 per cent, a fixed deposit would give better returns than an inflation-indexed bond.

How to subscribe?

The application form can be downloaded from the RBI’s website (application form). However, banks shall also get forms printed and made available to the investors. They will fill an application form and submit the same along with other documents and payment to the bank.

Subscription to the Bonds will be in the form of Cash/Drafts/Cheques/online through internet banking. Cheques or drafts should be drawn in favour of the bank (Receiving Office), specified below and payable at the place where the applications are tendered. Investors can invest through the authorised banks and Stock Holding Corporation of India (SHCIL). The authorised banks are SBI & Associates, Nationalised Banks, HDFC Bank, ICICI Bank, and Axis Bank.

On receipt of money, the bank will register the investor on the RBI’s web-based platform (E-Kuber) and on validation, generate the Certificate of Holding ( as shown in image below)

IINSSC Certificate of holding

IINSSC Certificate of holding

Reference : RBI India Webpage on Inflation Indexed National Savings Securities- Cumulative, 2013,

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So will you subscribe to Inflation Indexed National Saving Securities ? Why or Why not?

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