With reference to the India 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) IIGs 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
Solution
Option a is the correct answer.
Statement 1 is correct: As IIBs are G-Sec, they can be tradable in the secondary market like other G-Secs. G-Secs helps the Government to reduce the coupon rates on its borrowing. Like other G-Secs, coupon on IIBs would be paid on half yearly basis. Fixed coupon rate would be paid on the adjusted principal.
Statement 2 is correct: These instruments protect savings from inflation. It has been decided by the RBI to consider WPI for inflation protection in IIBs.
Statement 3 is incorrect: Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds.
