Fixed Income
RBI’s inflation index bonds deadline extended to 31st March

RBI’s inflation indexed bonds will be available till 31st March. The earlier deadline was 31st December. Is the extension due to poor response?

The Reserve Bank of India (RBI) has extended the deadline for its Inflation Indexed National Savings Securities-Cumulative (IINSS-C) securities subscription to 31 March 2014 from 31st December. The issuance can be closed earlier than 31st March with a prior notice. The central bank is using authorised agency banks and Stock Holding Corporation of India (SHCIL) to invest in IINSS-C. The authorized banks are State Bank of India (SBI) and its associates, all nationalized banks, HDFC Bank, ICICI Bank and Axis Bank.
 

The Union Budget of 2013-14 had announced the introduction of instruments that will protect retail savings from inflation. These are internationally known as inflation-linked securities or simply linkers. The distribution/sale of linkers would be through banks, for retail investors. Interest rate on these securities would be linked to final combined consumer price index [CPI (Base: 2010=100)]. Interest rate would comprise two parts: fixed rate (1.5%) and inflation rate, based on three-month lag CPI which will be compounded with the principal on a half-yearly basis and paid only at the time of maturity.
 

So, if a bond is being valued in December, the reference rate will be CPI of September. The issuance of non-cumulative inflation indexed bonds for retail investors will be examined in due course. The minimum and maximum investment per annum is Rs5,000 and Rs5 lakh, respectively. The tenor is fixed at 10 years. The new offering should attract higher attention from savers, especially due to its link to CPI instead of wholesale price index (WPI) which is a less accurate gauge of inflation. In June 2013, RBI sold WPI-linked bonds offering a yield of 1.44% above WPI, but the retail response was dismal. In November 2013, the WPI was 7.52% and CPI was 11.24%. The new offering linked to CPI will fetch 12.74% compared to the WPI-linked bonds that would give only 8.96%; a 10-year bank FD gives approximately 9%.
 

Read RBI’s inflation index bonds better than bank FD for retirement savings

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COMMENTS

deep sain

4 years ago

I had applied for Inflation Indexed National Saving Securities - Cumulative (IINSS-C) on 26/12/2013 through ICICI securities. The order status still shows it as Under process. I understand the offer end date has been moved to 31st March, but does that mean:

1. that the order will be processed after 31st March?
2. If that is the case, what will be the allotment date?
3. If the allotment date is post 31st March, will interest be paid for the amount deposited for these 3 months (26/12/2013 to 31/03/2014)?

Gopalakrishnan T V

4 years ago

The extension is of no use as the certificate is not at all attractive for middle and lower income group.High net worth individuals and black money honers they have better avenues in this economy and they also cannot be attracted to invest in these certificates. With this RBI has lost its credibility among the investing public particularly who have been badly hit by persisting inflation and all imaginable tax imposed on them. Measures have to come from the Government to control this unique inflation of this economy and improve the savings of the masses.

RBI’s inflation index bonds better than bank FD for retirement savings

RBI launched inflation indexed bonds will be available till 31st December. The good news is that the rate will be linked to CPI instead of WPI - the less accurate gauge of inflation. The bad news is that early redemption, even after the lock-in period is over, will entail hefty penalty. Should savers bite into the offering?

The Reserve Bank of India (RBI)’s Inflation Indexed National Savings Securities-Cumulative (IINSS-C) securities are open for subscription till 31st December. The central bank is using authorised agency banks and Stock Holding Corporation of India (SHCIL) to invest in IINSS-C. The authorized banks are State Bank of India (SBI) and its associates, all nationalized banks, HDFC Bank, ICICI Bank and Axis Bank.
 

The Union Budget of 2013-14 had announced the introduction of instruments that will protect retail savings from inflation. These are internationally known as inflation-linked securities or simply linkers. The distribution/sale of linkers would be through banks, for retail investors. Interest rate on these securities would be linked to final combined consumer price index [CPI (Base: 2010=100)]. Interest rate would comprise two parts: fixed rate (1.5%) and inflation rate, based on three-month lag CPI which will be compounded with the principal on a half-yearly basis and paid only at the time of maturity. So, if a bond is being valued in December, the reference rate will be CPI of September. The issuance of non-cumulative inflation indexed bonds for retail investors will be examined in due course. The minimum and maximum investment per annum is Rs5,000 and Rs5 lakh, respectively. The tenor is fixed at 10 years. The new offering should attract higher attention from savers, especially due to its link to CPI instead of wholesale price index (WPI) which is a less accurate gauge of inflation. In June 2013, RBI sold WPI-linked bonds offering a yield of 1.44% above WPI, but the retail response was dismal. In November 2013, the WPI was 7.52% and CPI was 11.24%. The new offering linked to CPI will fetch 12.74% compared to the WPI-linked bonds that would give only 8.96%; a 10-year bank FD gives approximately 9%.
 

CPI is considered a more accurate gauge of the impact of inflation on consumers because it takes into account increases in the cost of education, food, transportation, housing and medical care; in WPI, the emphasis is on measuring the prices of traded goods and services.
 

Advantages of IINSS-C
 

Inflation has been high in India in recent years; this bodes good returns and protection from inflation by investment in IINSS-C. The safety of the principal should not be a cause of concern as the bonds are a part of the government’s borrowing programme. IINSS-C will be considered at par with sovereign rated government securities (G-Secs).
 

Even though IINSS-C will be taxed like fixed-deposits (FD), the interest can be substantially higher than FDs during a period of high inflation. Conversely, the returns can go lower than FDs, when inflation is low. FD rates can also go low when inflation dips and, hence, IINSS-C should be preferred over FD, as long as you have a commitment to stay with the product for a long term. For example, CPI of 11.24% in November 2013 means you can expect to get 12.74%pa (per annum) assuming inflation stays at the same level. With inflation levels fluctuating, the returns from IINSS-C will have a zigzag pattern. Scheduled commercial banks offer approximately 9%pa for 10-year FDs which is guaranteed for the full period.
 

The product should be easy to purchase from banks; servicing it should not be an issue due to bank involvement. It can be used as collateral for loans from banks, financial Institutions and Non Banking Financial Companies (NBFC). The transferability is limited to nominee(s) on death of holder (only individuals).
 

IINSS-C can be used to diversify one’s debt portfolio. Their advantage over bonds is that technically the principal is protected in IINSS-C. Selling bonds (taxable or tax-free) during high interest regime can result in getting a price lower than the principal. Early redemption of IINSS-C, after expiry of the lock-in period will ensure that you get back your principal even if inflation falls drastically; but you will take a beating due to the penalty on the coupon rate. It works more like bank FDs which have a penalty on premature withdrawal.
 

IINSS-C is more like FD, less like a bond. IINSS-C surely has an advantage over taxable and tax-free bonds for the conservative saver who does not like the volatility of the investment amount, based on market interest rates.
 

IINSS-C should dissuade savers from buying gold for investment purposes. Beating inflation with gold has been a fallacy; IINSS-C should be an option for this segment as it will actually make your money grow at a rate higher than inflation. It can be an instrument for retirement savings.
 

Disadvantages of IINSS-C
 

The bonds are meant to be long-term savings instruments. They will not be tradable in the secondary market. Liquidity is certainly an issue with IINSS-C; bank FDs are completely liquid; some banks do not even have a penalty on premature withdrawals for all FDs or depending on the tenor of the FD.
 

Early redemptions will be allowed after one year from the date of issue for senior citizens (those above 65 years of age) and three years for all others, subject to penalty charges at the rate of 50% of the last coupon payable for early redemption. For example, if you redeem after the third year, you lose half the interest of the previous year. Early redemptions, however, will be made only on coupon dates. Hefty penalty for early redemption is a major deterrent; but bank FDs too have premature withdrawal penalty of 1% lesser interest rate than the rate offered for the period for which the FD was kept. The calculation of bank FD penalty will be similar to IINSS-C penalty and, hence, there is no reason to overlook IINSS-C. If your investment horizon is shorter than three years, you should not go for this instrument.
 

Read - Inflation Index Bonds Vs Bank FDs – Early redemption penalty decoded

The Finance Bill of 2012 had lowered the age of senior citizens from 65 years to 60 years for tax benefit purposes. The circular of RBI on IINSS-C, which states that 65 years has to be considered for qualifying as a senior citizen, has brought back the debate on senior citizen’s age.
 

IINSS-C does not match the charm of public provident fund ( PPF) which allows Rs1 lakh investment in a year for tax deduction under Section 80C. Moreover, interest on PPF is tax free. IINSS-C may not even score over tax-free bonds, especially for savers in the 30% tax bracket. The recent tax-free bonds issues offered coupon rates of 8.66% and 8.76% for AAA and AA+ rated bonds, respectively, of 10-year tenors.
 

Rate of interest on IINSS-C will be floating which may not be suitable for those in need of fixed income. Moreover, absence of income flow can make the product unattractive for senior citizens. IINSS-C will have half-yearly compounded cumulative offer of 10-year tenor. Bank FD interest is compounded quarterly for the cumulative as well as non-cumulative option.
 

Tax treatment on interest and principal repayment would be as per the extant taxation provisions. Tax will be levied on the interest as per your tax bracket, which is in line with bank FD. The product is suitable for those in the lower tax bracket (up to 10%). It may work out well for those in the 20% tax bracket, if inflation remains at the current level for much of the 10-year tenor. Some media reports talk about considering payment as capital gains which will lower the tax rate. But, ignore such misinterpretation and calculate tax payment, based on your tax slab.
 

Read - Inflation Index Bonds – How will the taxation impact you?

There are doubts about the true consumer price inflation. If actual inflation is higher, IINSS-C returns will be lower, even in a high inflation regime. Flawed inflation data can be a major worry for IINSS-C investors; but investors, by and large, don’t see costs and returns in inflation-adjusted terms.

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COMMENTS

praveen rajvanshi

2 years ago

dear sir,
i have invested in rbi iinss-c scheme in 2013 & want to know my current value.please tell me how van i know my current value.
regds.

myfuture

4 years ago

Please cover stories about those bank account holders whoes bank have gone under liquidation and have received only upto 1 lac from bank under insurance gurranty by DICGC but their money in bank was much more than 1 lac and even after many years no one is helping them to return their money

REPLY

Sucheta Dalal

In Reply to myfuture 4 years ago

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We wish corporate India would encourage people to attend too. They are free. Membership is free. check http://foundation.moneylife.in

Narayanaswami Natarajan

4 years ago

The bond conditions are very vague. It is not clear why the bonds cannot be allotted in DMAT form. RBI is still in the 20th century. The redemption rules are cumbersome. In many cases the senior citizen will not be alive or fit to claim redemption. Is that what RBI wants? KYC has become an instrument of harassment by banks who repeatedly make you file details every now and than on the excuse that RBI has revised the form. Moreover the bonds would have been investor friendly if RBI had assured a minimum interest of at least 8 or 8.5 percent. As no interest will be actually paid, will the holder have to pay tax on it every year from other incomes? What about his problems of cash flow to meet his expenditure?

Yerram Raju Behara

4 years ago

I join T.V. Gopalakrishnan on this issue. This instrument is least helpful for the senior citizens. When the intention is to facilitate the senior citizens with liquidity after one year of lock-in period to deprive them of the 50% interest earning on the bond does not sound pragmatic. The RBI would do well to amend this part of the dispensation when many a senior citizen could consider subscribing to this instrument.

Gopalakrishnan T V

4 years ago

This inflation index bonds of RBI are neither attractive nor acceptable for the saving community from middle class and lower middle class who include Retired category and pensioners. The reasons are1) The return assured is only 1.5 % above the inflation index which is flexible and not reflecting the ground realities of retail prices in the market,2) the money is locked up and interest income is cumulative in nature,3)the interest income is taxable4) the procedure involved is not customer friendly. Apart from these disadvantages, why RBI which is of late shedding all its retail functions including the very essential and traditional function of issue of fresh notes and coins should undertake this retail issue of certificates though through banks to small savers is a mystery. Its Public Debt Department is almost facing closure and the activities in relation to public debt are being taken over by the Central government to divest RBI of its public Debt function to remove the conflict of monetary policy functions. The RBI cannot control the present inflation as it is caused because of several reasons other than monetary policy implications is proved beyond doubt since 2009 onwards. Strange are the ways the RBI is functioning of late.

REPLY

R Varadarajan

In Reply to Gopalakrishnan T V 4 years ago

I fully agree with Mr Gopalakrishnan. In fact, it is not attractive at all.

DEEPAK KHEMANI

4 years ago

Makes sense for those in the lower tax bracket otherwise the tax free bonds are an excellent choice for those in the higher tax slab

REPLY

Vijay Jasuja

In Reply to DEEPAK KHEMANI 4 years ago

What happens if CPI falls to 6-7%? Even the 10% Tax bracket persons will find it unattarctive. Considering lock-in for long periods there is good amount of risk involved

ajay vijay mandlekar

4 years ago

Sir, From Where i can purchase these Inflection index bonds please clear. My Mail ID in ajayvm09@gmail.com.

REPLY

raj

In Reply to ajay vijay mandlekar 4 years ago

The central bank is using authorised agency banks and Stock Holding Corporation of India (SHCIL) to invest in IINSS-C. The authorized banks are State Bank of India (SBI) and its associates, all nationalized banks, HDFC Bank, ICICI Bank and Axis Bank.

Inflation Index Bonds – How will the taxation impact you?

Inflation Indexed Bonds are a welcome option for a long-term conservative saver. Find out how the taxation works before you plunge into the product. The returns will vary based on your tax bracket. It will work well as a retirement savings tool for those in the lower tax bracket
 

Inflation Indexed National Savings Securities-Cumulative (IINSS-C) securities are being launched by the Reserve Bank of India (RBI) in the backdrop of announcement made in the Union Budget 2013-14 to introduce instruments that will protect savings from inflation. Interest rate on these securities would be linked to final combined Consumer Price Index [CPI (Base: 2010=100)]. Interest rate would comprise two parts - fixed rate (1.5%) and inflation rate based on CPI and the same will be compounded in the principal on half-yearly basis and paid only at the time of maturity. E.g. CPI of 11.24% in November 2013 means you can expect to get 12.74% pa assuming inflation stays at the same level. The minimum and maximum investment per annum is Rs5,000 and Rs5 lakh respectively. The tenor is fixed at 10 years.
 

Taxation:

Do not misinterpret the taxation of IINSS-C; there are conflicting media reports on tax issue. Some media reports talk about considering payment as capital gains, which will lower the tax rate. But, ignore such misinterpretation and calculate tax payments based on your tax slab. According to Vivek Sharma, a personal-finance expert, “There is no special tax treatment of inflation indexed bonds. These will be treated as normal bonds and taxed.”
 

Tax treatment on interest and principal repayment would be as per the extant taxation provision. Tax will be levied on the interest as per your tax bracket, which is inline with bank FD taxation. INSS-C is suitable for those in lower tax bracket (up to 10%). It is a better option than bank fixed-deposits (FD). IINSS-C may work out well for those in 20% tax bracket if inflation remains at current level for much of the 10 year tenor. Those in highest tax bracket will do better with tax-free bonds.
 

Read - Inflation Index Bonds & Bank FD – Early redemption penalty decoded

One drawback with cumulative FDs is that you have to pay tax on the interest that you don’t receive in hand. You get the interest only on maturity of the cumulative FD, but tax on the accrued interest is payable for each financial year in which it accrues. The same will be an issue with IINSS-C. The government will earn the tax payment on accrued interest without paying you any interest for 10 years. The higher the inflation, the higher the accrued interest and hence more tax will be collected. If the inflation dips, the government will benefit by having to pay lower interest on product maturity. RBI circular specifies that issuance of non-cumulative inflation indexed bonds for retail investors will be examined in due course. It will have to be seen if and when non-cumulative option really comes.
 

According to Vivek Rege, SEBI registered investment adviser, “IINSS-C will give variable income, which is cumulative. It means income is earned and re-invested as per the product feature and conditions, once income is accrued it is taxable in the hand of the individual as per tax bracket. Income tax offers flexibility of cash or accrual basis, but cash basis will not work practically since all interest will be taxed in one single year and hence it will be offered for tax each year. Income tax does offer both options to the assessee in case of accrual products, but it should be uniform and not instrument wise.”
 

According to Rajesh Gada, chartered accountant, “If an assessee is following mercantile system, then he/she will pay tax on accrual interest either by way of advance tax or self-assessment tax while filing return. If assessee is following cash system in respect of interest income, then entire income to be shown at the time of final receipt and tax to be paid when money received. For ‘income from other sources’, normally one pays tax on the basis of mercantile system even though they are not receiving actual payment. From accounting principle point of view and direct/indirect taxation point of view, mercantile system is better for majority of cases. If Form 26AS shows TDS and correspondingly assessee is not showing income, IT officer can question why income is not shown and assessee need to face issues to explain and prove accounting system. Similarly, if one is declaring income at the time of receipt of interest (at maturity) at the end of 10 year, there will be practical difficulties to claim tax credit (i.e. credit of TDS of all the previous year to be clubbed in the year of receipt of income). At present, income tax return does not have provision to give reconciliation, so practically, mercantile system is better.”

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