Inflation Indexed bonds-Key features

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Inflation Indexed bonds-Key features
Inflation Indexed National Savings Securities-Cumulative (IINSS-C) bonds linked to CPI or consumer price inflation index as announced by the RBI shall be launched in the second half of December for retail investors. Here is a look at some of its key features:

Minimum and Maximum Investment Limit: The face value of the CPI-linked indexed bonds is Rs. 5000 i.e. for investing in such bonds an investor needs to dole out a minimum sum of Rs. 5000. And the maximum limit for investment in such bonds in a fiscal year is Rs. 5 lakhs.

Maturity term: The bonds shall feature a maturity term of 10 years. However, early redemption with levy of penalty charges will be allowed to both senior and other citizens after a year and three years term respectively.

Eligible to be used as collateral for securing loan: IINSS-C bonds can also serve as the collateral for securing finance from banks and other financial institutions.

Annual rate of interest: The interest on CPI-linked indexed bonds will be compounded half-yearly at real interest rate (fixed rate of 1.5% p.a.) + inflation rate. So, if CPI is 9%, an investor will reap a return of 10.5% (9% +1.5%).

Nomination: The bondholder can nominate one or more individuals to be entitled to the bond and coupon rates thereon in case of his death. Even an NRI can be appointed as a nominee.

Is CPI-linked indexed bonds a better option than other debt instruments?
When compared with bank fixed deposits, such CPI-linked indexed bonds shall provide a higher rate of return as currently the average rate of return on FDs is below the CPI index. However, in comparison to other debt-instruments, including tax-free bonds and PPF, investment in such bonds is unlikely to yield attractive post-tax returns for those in the higher income tax bracket as interest earned on these bonds is not tax-free in the hands of investors.

Other aspects that make CPI-linked indexed bonds less attractive

Penalty @ 50% of the last  coupon payable is levied in case of early redemption. Further, redemption can be made only on coupon dates.

Payment of interest only on maturity of the instrument also makes the instrument less attractive for investors seeking some regular income.

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