The RBI has launch Inflation Indexed National Savings Securities-Cumulative, bench-marked against CPI (Consumer Price Index).
Table of Contents
The interest rate to be paid to the investors will be combination of base rate and CPI index.
Base rate of 1.5% (annual) + Inflation Rate based on the final combined Consumer Price Index (compounded half-yearly). For example, if inflation rate is 9.5%, then annual interest rate will be 11%.
- Minimum Investment – Rs. 5,000
- Maximum Investment – Rs. 5 lakh p.a.
Tenor of Bonds – 10 years
Redemption – After one year for senior citizens and after 3 years for all others. (Penalty amounting to half the interest paid in last year)
Eligibility – Individuals, HUF, Charitable Institutions and Universities
Application – contact nearest branches of SBI & associates, Nationalized Banks, HDFC Bank, ICICI Bank, Axis Bank and SHCIL
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What is inflation?
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
What is Consumer Price Index?
A consumer price index (CPI) measures changes in the price level (or inflation) of a market basket of consumer goods and services purchased by households. It is different from Wholesale price index where wholesale prices are taken in to consideration.
Benefit of Inflation Proof Bond
As these bonds are benchmarked against Consumer Price Index, which is a reflection of retail inflation, you will always earn 1.5% more than inflation. This is really good in comparison of the returns offered by FD’s as many a times it goes below the inflation rate resulting in the negative real return.
These bonds would be subject to the income tax slab rate applicable to the investor and hence no tax incentive will be given for interest earned. For example, if the coupon rate for these bonds is 11.5% in a given year, then the post-tax return for that year for someone in the highest tax bracket will be 7.95%.
Following is a post tax comparison of these bonds with other investment products by Mint.
It is good investment for people in lower tax bracket as return will be higher for those people. Anyways this is a good investment to diversify your portfolio.
Important FAQ’s (by RBI)
. What is the inflation index to which inflation rate will be linked?
- Inflation rate will be based on the final combined Consumer Price Index [(CPI) base: 2010=100].
- The final combined CPI will be used as reference CPI with a lag of three months. For example, the final combined CPI for September 2013 will be used as reference CPI for whole of December 2013.
2. Is there any floor as inflation may turn into deflation at times?
- Yes, fixed rate of 1.5% would act as a floor, which means that 1.5% per annum interest rate is guaranteed if there is deflation.
- For example, if inflation rate is (-) 5%, then interest rate should be (-) 3.5% by simple calculation. But in such case, negative inflation will not be recognised and investors would get fixed rate of 1.5%.
3. 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.
4. What will I get on redemption?
- On redemption, investors will get principal and compounded interest.
5. What will be the process of investing?
- Investors can invest through the authorised banks and Stock Holding Corporation of India (SHCIL).
- They will fill an application form and submit the same along with other documents and payment to the 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.
6. What will be the form of these securities?
- These securities will be issued in the form of Bonds Ledger Account (BLA).
- The securities in the form of BLA will be issued and held with RBI and thus, RBI will act as central depository.
- A certificate of holding will be issued to the holder of securities in BLA.
7. Whether investor needs to open a BLA account with a bank for making an investing?
- Investor does not need to open a BLA with any bank for making investment.
- After receiving the money and registration of the investor on RBI’s CBS (E-Kuber), the RBI will open a BLA for each investor and issue a “Certificate of Holding” indicating number of units of IINSS-C held by the investor.
8. Who will provide the other customer services to the investors after issuance of securities?
- The banks through which these securities have been purchased will provide other customer services.
- Investors can approach the banks for other services such as change of address, early redemption, nomination, lien marking, etc.
9. 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 immediately on the maturity date for payments through electronic mode and within maximum five days for any payment through physical instruments.
10. Whether these securities transferable?
- Transferability is allowed to the nominee(s) only for individual investors on death of holder.
- Transferability is not allowed for other investors
11. Can I use these securities as collateral for loans?
- Yes, these securities are eligible to be used as collateral for loans from banks, financial Institutions and Non Banking Financial Companies, (NBFC).
12. Banks will offer loans against the collateral of IINSS-C at what rate of interest?
- As per extant RBI’s guidelines, banks will be free to decide interest rate on loans against these securities, subject to the condition that such interest rate is to be at base rate or above.
13. Whether TDS will be applicable?
- Existing taxation applicable to Government of India securities will be applicable to these securities.
- Sub-section (iv) of the Section 193 of the Income Tax Act, 1961 stipulates that no tax shall be deducted from any interest payable on any security of the Central Government or a State Government, provided that nothing contained in this clause shall apply to the interest exceeding rupees ten thousand payable on 8% Savings (Taxable) Bonds, 2003 during the financial year.
- As per the above Section, TDS shall not be deducted from any interest payable on IINSS-C, until and unless notified by the Government of India otherwise.