Inflation Indexed Bonds- No Tax Exemption

As we all know that by investing in bonds we get exemption but Reserve Bank of India has cleared that there will be no special tax exemption for inflation indexed bonds.
The Finance Minister P.Chidambaram , announced that RBI would launch inflation indexed bonds to help public hedge themselves against price increases at a time real interest rates are still negative, hence crimping their savings.

But do these indexed bonds are really protecting our savings?
Firstly, from last six months inflation is easing so time is clearly favoring government.
Under the scheme, the principal amount of these 10-year bonds will be adjusted against inflation and periodic coupon payments will be made on the adjusted principal. At maturity, the adjusted principal or the face value whichever is higher will be paid. There is wide divergence between the WPI and the CPI in India. While WPI has fallen to 4.89 per cent in April, the CPI is still high at 9.39 per cent.

There is the use of the ‘auction method’ for determining the coupon rate for the inflation-indexed bonds. So the first lot of Rs 1,000-2,000 crore bonds slated for June 4 is not for retail investors. They will have to wait till October this year to apply for the inflation index bonds. By that time, inflation will definitely have reached a comfort zone for the RBI, the government and households as well.

These bonds will not enjoy any special tax benefits and all the taxes which will be applicable will be at par with any other government security. They will also be considered in the statutory liquidity ratio requirements of banks.

Foreign investors will be able to buy these bonds, but within the accessible total investment limits of $25 billion of government debt.

While government bonds are issued on a weekly basis, the inflation-linked bonds will be issued separately on a monthly basis.

Inflation bonds will also be qualified for short-selling and repo transactions, the RBI official said. The instrument will also be traded like any other government security, giving investors a scope to exit their investments.

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