The Inflation Indexed National Saving Securities (INSS) was launched, so as to enable investors beat inflation, by keeping the interest rates in line with inflation.
How does the interest rate on these Inflation Indexed National Saving Securities work?
The interest rates comprise of two components. The first component is a fixed rate and the second is linked to inflation.
The fixed interest rate is 1.5 per cent, which you will get in any and every case. What this means is that even if there is an inflation of -3 or -4 per cent, you are still guaranteed the1.5 per cent.
Another component of the interest rates on the Inflation Indexed National Saving Securities or Inflation Bonds, is linked to inflation.
So, you will get your component of fixed rate, as well as the inflation component. Let us see how it works on a six month basis. For example, if annualized inflation is 5 per cent, you would get 2.5 per cent, plus the 0.75 per cent for the six months. So, what you would get is 3.25 per cent for a six month period.
Again, if in the next 6 months, the inflation remains at 5 per cent (annualized), you would get another 3.25 per cent, taking your total interest rate during the year to 6.5 per cent.
Is there is a floor price for Inflation Indexed National Saving Securities (INSS)
There is a floor price of 1.5 per cent on the inflation indexed bonds. So, no matter where inflation is headed, you are guaranteed this sum.
In the above, we have given an example of six months, because interest rate under the Inflation Indexed National Saving Securities is paid every six months.
How do I invest in these inflation indexed bonds?
You can invest in these bonds through the Stock Holding Corporation or through the banks that have been authorized for the purpose.
The minimum amount that you can invest in the scheme is Rs 5000, while the upper limit is Rs 5 lakhs.
In case you wish to redeem the inflation indexed bonds, you can do so my submitting your application to the concerned banks.
You can also redeem the Inflation Indexed National Saving Securities, before maturity and the same procedure would apply.
As far as taxation is concerned, the same rule as pertains to government securities would apply to these inflation indexed bonds. What this means is that at least for the time being there would be no TDS on these instruments.
Should you invest in the Inflation Indexed National Saving Securities (INSS)?
The interest rates on these bonds are going to be marginally above the inflation rate. The bonds will just about manage to sustain your expenditure and maybe unable to generate wealth.
If you wish to generate wealth, you would have to look at other options like equities, which tend to make money much faster than these bonds. However, equities are not very safe as compared to the Inflation indexed bonds.