With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)”?

Prelims 2022 Question:

With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)”?

1. Government can reduce the coupon rates on its borrowing by way of IIBs.
2. IIBs provide protection to the investors from uncertainty regarding inflation. 
3. The interest received as well as capital gains on IIBs are not taxable. 

Which of the statements given above are correct?

a) 1 and 2 only

b) 2 and 3 only

c) 1 and 3 only

d) 1, 2 and 3

Correct Answer: Option a) 1 and 2 only

Explanation:

Learn more about inflation Indexed bonds in the given explanation below.

Inflation-Indexed Bonds

• Inflation-Indexed bonds, or IIBs, are securities designed to help protect investors from inflation. IIBs are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation. Government can reduce coupon rates on its borrowing by way of IIBs. So, statement 1 is correct.
• An inflation-indexed bond protects both investors and issuers from the uncertainty of inflation over the life of the bond. So, statement 2 is correct.
• Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds. So, statement 3 is not correct.

Features of Inflation Indexed Bonds

• Coupon payments: Twice a year, you will receive a fixed interest payment on the adjusted principal amount of your investment.
• Investment term: These bonds are issued for a period of 10 years.
• SLR status: As government securities (G-secs), these bonds are eligible for Statutory Liquidity Ratio (SLR) status, which means that banks and other financial institutions are required to hold a certain percentage of their assets in G-secs.
• Objective: These bonds are designed to protect the savings of the middle class and the poor from inflation.
• Investment limits: Individual investors can invest up to Rs. 10 lakh per year, while institutional investors can invest up to Rs.25 lakh per year. The minimum investment amount is Rs. 5000.

Therefore, option (a) is the correct answer.

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