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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