With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)” ?
- Government can reduce the coupon rates on its borrowing by way of IIBs.
- IIBs provide protection to the 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 ?
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC IAS – 2022
Statement 2 is correct. IIBs provide a hedge against inflation risk. The payments received by the investor are adjusted based on changes in a specified inflation index (like the Consumer Price Index), ensuring that the real value of their investment is preserved. This protects investors from the uncertainty of future inflation rates eroding their returns.
Statement 3 is incorrect. Both the periodic interest payments (coupon) received on IIBs and the increase in the principal amount due to inflation indexation are generally taxable under Indian income tax laws. The interest is taxed as income from other sources, and the capital appreciation due to indexation is taxed as capital gains (short-term or long-term depending on the holding period).