New financial year to see more investor friendly Inflation Indexed Bonds

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New financial year to see more investor friendly Inflation Indexed Bonds
Inflation Indexed bonds that failed to gain flavor among retail investor class will see some changes when it will be relaunched in the current fiscal year. The idea was contrived on the sidelines of the first bi-monthly monetary policy meet of the RBI, wherein it put forth the need to introduce some measures to enhance investors interest in the instrument.

With regard to the new series i.e. to be introduced in the current fiscal, a senior official was quoted in one of the business dailies saying "These will be more investor-friendly in nature with additional features such as tradability. The plan is to launch it in the first quarter of the fiscal if we get the go ahead". To know about the features of the IIBs introduced last fiscal. Click on the link herein.

As regard to the other changes which are being mulled upon, RBI Governor, Raghuram Rajan said, "Other (changes) such as tradability (and consequently, the benefit of indexation for capital gains tax) and issuance of securities with regular coupon flows are being contemplated".

The current fiscal year is set to see the launch of inflation indexed bonds that are linked to both CPI and WPI. The provision for the relaunch of the inflation-indexed bonds has already been made in the borrowing programme of the government for the financial year.

Only, last month the RBI, raised the ceiling of investment in such bonds to Rs. 10 lakh for retail investor class and Rs. 25 lakh for education endowments, charitable trust, similar other non-profit organizations and HUFs.

Also with the likely provision of tradability of such bonds, capital gains might accrue and hence the clause of providing indexation benefits shall apply. So, computation of tax on the gains shall be done after factoring in the indexation benefit.

But, in the today's scenario when the bond does not trades in the secondary market, income in the form of interest or coupon is added to the total income of the investor and is taxable under the head 'income from other sources' at the applicable tax rate. Nonetheless, as per experts whether or not the bonds trade in the secondary market, taxability of interest will remain the same.

Story first published: Friday, April 4, 2014, 9:31 [IST]
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