Here is Question No. 5 a part of our series on UPSC Prelims 2022.
Q5. With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)”?
- The government can reduce the coupon rates on its borrowing by way of IIBs.
- IIBS provide protection to investors from uncertainty regarding inflation.
- The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Answer – A
- Statement 1 is correct: As IIBs are G-Secs, they can be tradable in the secondary market like other G-Secs. G-Secs helps the Government to reduce the coupon rates on its borrowing. Like other G-Secs, coupon on IIBs would be paid on a half-yearly basis. Fixed coupon rate would be paid on the adjusted principal.Since these bonds provide no risk of capital loss, they can offer a lesser rate of interest (coupon) as interest is directly proportional to risk.
- Statement 2 is correct: These instruments protect savings from inflation. It has been decided by the RBI to consider WPI for inflation protection in IIBs.Inflation-indexed bonds provide protection to investors from uncertainty regarding inflation.
- Statement 3 is incorrect: Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds. Interest and inflation compensation both are taxable.
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