Monday, December 23, 2013

Newly Launched Inflation Indexed Bonds by RBI

Inflation Index Bonds (IINS-C)


As per promised in the Union Budget 2013-14, RBI has launched Inflation Indexed National Securities – Cumulative (IINS-C) in this month.. The total return on this fund would be depends on fixed rate (1.5%) and inflation rate based on Consumer Price Index (CPI). Interest rate will be compounded half yearly and only paid at the time of maturity.

The maturity period of this fund is 10 year. The minimum investment allowed in this fund is Rs 5,000 and the maximum investment allowed up to Rs 5 Lakh. The prime mandate of these type of bond are to provide the assurance to the investor to beat the inflation.

Most of investors want to know that which is much better option between bank fixed deposit and inflation indexed bond. To understand it better, here we are going to compare tax liability and penalty if we withdraw fund premature.

Premature Withdrawal:

In case of bank fixed deposit, if you redeem before the maturity, there is penalty of 1% on whole accrued interest amount, it means you will get 1% less interest rate from the rate whatever bank offer you at the time of deposit.

In case of inflation index bond (IINS-C), there would be deduction of 50% of last coupon (interest) rate as penalty, if withdraw it premature. During the time of high inflation, IINS-C will give substantially high return than bank fixed deposit. The return on these bonds would be volatile compare with bank FD which gives fix rate of return.

Inflation index bond allow early withdrawal after one year for senior citizen (above 65 year age) and three year for others.

Comparison for Taxation:

Tax will be levied on interest as per tax slab in both cases. In case of bank fix deposit, you pay tax on each financial year on the accrued interest which is only available at the time of maturity.

In case of IINS-C, investor can pay tax in each financial year or pay once at the time of maturity. Income tax department provide both options in accrual products but it should be uniform, not financial instrument wise.

If you do not need interval income and want  to beat inflation in the long run without taking any risk then these bonds may prove for you good investment option.

It is the vast subjective subject. For more detail and any other query related investment, you can contact me through my email

Warm regards,

Arvind Trivedi
Certified Financial Planner


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