RBI’s Inflation Indexed National Savings Securities – FAQ’s

The Government of India has decided to issue Inflation Indexed National Savings Securities which is aimed at an alternative instruments to hedge the rate of inflation. This issue is intended for Retail Investors and are linked to the Consumer Price Index (CPI) (Base : 2010=100).

The FAQs of Inflation Indexed National Savings Securities are given below :-

1. Who is eligible to invest in the Inflation Indexed National Saving Securities-Cumulative (IINSS-C)?

  • Only retail investors would be eligible to invest in these securities. The retail investors would include individuals, Hindu Undivided Family (HUF), charitable institutions registered under section 25 of the Indian Companies Act and Universities incorporated by Central, State or Provincial Act or declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956).

2. What is the interest rate on these securities?

  • There will be two parts in the interest rate. One, fixed rate of 1.5% per annum and second, inflation rate.
  • For example, if inflation rate during the six months is 5%, then interest rate for this six months would be 5.75% (i.e. fixed rate -0.75% and inflation rate -5%).

3. Is there any floor as inflation may turn into deflation at times?

  • Yes, fixed rate of 1.5% would act as a floor, which means that 1.5% per annum interest rate is guaranteed if there is deflation.
  • For example, if inflation rate is (-) 5%, then interest rate should be (-) 3.5% by simple calculation. But in such case, negative inflation will not be recognised and investors would get fixed rate of 1.5% (please see example 2 at 23).

4. When do I get interest?

  • Interest will be accrued and compounded in the principal on half-yearly basis and paid along with principal at the time of redemption.

5. What will I get on redemption?

  • On redemption, investors will get principal and compounded interest

6. What is the inflation index to which inflation rate will be linked?

  • Inflation rate will be based on the final combined Consumer Price Index [(CPI) base: 2010=100].
  • The final combined CPI will be used as reference CPI with a lag of three months. For example, the final combined CPI for September 2013 will be used as reference CPI for whole of December 2013.

7. What will be the process of investing?

  • Investors can invest through the authorised banks and Stock Holding Corporation of India (SHCIL).
  • They will fill an application form and submit the same along with other documents and payment to the bank.
  • On receipt of money, the bank will register the investor on the RBI’s web-based platform (E-Kuber) and on validation, generate the Certificate of Holding.

8. What will be the form of these securities?

  • These securities will be issued in the form of Bonds Ledger Account (BLA) The securities in the form of BLA will be issued and held with RBI and thus, RBI will act as central depository.
  • A certificate of holding will be issued to the holder of securities in BLA.

9. Which are the authorised banks?

  • The authorised banks are SBI & Associates, Nationalised Banks, HDFC Bank, ICICI Bank, and Axis Bank.

10. Should the customer apply through the bank in which he/she has an account?

  • Customers can approach any of the authorised banks, including SHCIL for such investment irrespective of whether they hold an account or not with that bank.

11. Who will provide the other customer services to the investors after issuance of securities?

  • The banks through which these securities have been purchased will provide other customer services.
  • Investors can approach the banks for other services such as change of address, early redemption, nomination, lien marking, etc.

12. Whether joint holding will be allowed?

  • Yes, joint holding will be allowed.

13. What is the minimum and maximum limit for investment?

  • The minimum investment limit is Rs. 5,000/- (five thousand).
  • The maximum limit is Rs. 500,000/- (five lakh) per applicant per annum.

14. Whether premature redemption is allowed?

  • Yes premature redemption is allowed.
  • For senior citizens above 65 years, the premature redemption is allowed after one year. For others, it is allowed after 3 years.
  • Penalty at the rate of half of the last payable coupon will be charged from the investors. For example, if last payable coupon is Rs. 1,000/-, then Rs. 500 would be charged as penalty.

15. How do I redeem these securities?

  • In case of redemption prematurely before the maturity date, investors can approach the concerned bank few days before the coupon date and apply.
  • In case of redemption on maturity, the investor will be advised one month before maturity regarding the ensuing maturity of the bond advising them to provide a Letter of Acquaintance, confirming the NEFT account details, etc. If everything is in order the investor has to be paid within maximum five days of the maturity (to take care of any payment in the form of physical instrument).

16. Whether these securities transferable?

  • Transferability is allowed to the nominee(s) only for individual investors on death of holder.
  • Transferability is not allowed for other investors

17. Can I use these securities as collateral for loans?

  • Yes, these securities are eligible to be used as collateral for loans from banks, financial Institutions and Non Banking Financial Companies, (NBFC).

18. What are the tax implications?

  • Existing taxation applicable to Government of India securities issued as part of the market borrowing will be applicable to these securities.

19. Whether TDS will be applicable?

  • Existing taxation applicable to Government of India securities will be applicable to these securities.
  • Sub-section (iv) of the Section 193 of the Income Tax Act, 1961 stipulates that no tax shall be deducted from any interest payable on any security of the Central Government or a State Government, provided that nothing contained in this clause shall apply to the interest exceeding rupees ten thousand payable on 8% Savings (Taxable) Bonds, 2003 during the financial year.
  • As per the above Section, TDS shall not be deducted from any interest payable on IINSS-C, until and unless notified by the Government of India otherwise.

20. Who will do the KYC?

  • As customers will be owned by the banks, KYC will also be done by the banks.

21. When will customers be issued securities?

  • The customers should be issued the securities after receiving clear money. After receiving clear money, banks should register the customer on CBS and generate Certificate of Holding.

22. Where can investors get the application form?

  • The application form can be downloaded from the RBI’s website. However, banks shall also get forms printed and made available to the investors.

23. An example of cash flows/ compounding of principal for illustration purpose is as under:

Example 1: Fixed rate 1.5% per annum

Issue/ Coupon/ maturity date

Fixed rate

CPI

Inflation rate

Interest rate (Compounding rate)

Principal

I

II

III

IV

V=II+IV

VI=VI*V

25-Dec-13

150

5000

25-Jun-14

0.75

160

6.67

7.4

5371

25-Dec-14

0.75

166

3.75

4.5

5613

25-Jun-15

0.75

175

5.42

6.2

5959

25-Dec-15

0.75

185

5.71

6.5

6344

25-Jun-16

0.75

190

2.70

3.5

6563

25-Dec-16

0.75

200

5.26

6.0

6958

25-Jun-17

0.75

210

5.00

5.8

7358

25-Dec-17

0.75

218

3.81

4.6

7693

25-Jun-18

0.75

228

4.59

5.3

8104

25-Dec-18

0.75

235

3.07

3.8

8414

25-Jun-19

0.75

246

4.68

5.4

8870

25-Dec-19

0.75

255

3.66

4.4

9262

25-Jun-20

0.75

265

3.92

4.7

9694

25-Dec-20

0.75

280

5.66

6.4

10316

25-Jun-21

0.75

290

3.57

4.3

10761

25-Dec-21

0.75

305

5.17

5.9

11399

25-Jun-22

0.75

316

3.61

4.4

11895

25-Dec-22

0.75

330

4.43

5.2

12512

25-Jun-23

0.75

340

3.03

3.8

12985

25-Dec-23

0.75

355

4.41

5.2

13655

 

Example 2: Fixed rate 1.5% per annum

Issue/ Coupon/ maturity date

Fixed rate

CPI

Inflation rate

Interest rate (Compounding rate)

Principal

I

II

III

IV

V=II+IV

VI=VI*V

25-Dec-13

150

5000

25-Jun-14

0.75

160

6.67

7.42

5371

25-Dec-14

0.75

166

3.75

4.50

5613

25-Jun-15

0.75

160

-3.61

0.75

5655

25-Dec-15

0.75

150

-6.25

0.75

5697

25-Jun-16

0.75

160

6.67

7.42

6120

25-Dec-16

0.75

165

3.13

3.88

6357

25-Jun-17

0.75

168

1.82

2.57

6520

25-Dec-17

0.75

175

4.17

4.92

6841

25-Jun-18

0.75

170

-2.86

0.75

6892

25-Dec-18

0.75

175

2.94

3.69

7146

25-Jun-19

0.75

180

2.86

3.61

7404

25-Dec-19

0.75

190

5.56

6.31

7871

25-Jun-20

0.75

188

-1.05

0.75

7930

25-Dec-20

0.75

195

3.72

4.47

8285

25-Jun-21

0.75

200

2.56

3.31

8559

25-Dec-21

0.75

205

2.50

3.25

8837

25-Jun-22

0.75

215

4.88

5.63

9335

25-Dec-22

0.75

220

2.33

3.08

9622

25-Jun-23

0.75

230

4.55

5.30

10131

25-Dec-23

0.75

220

-4.35

0.75

10207

Courtesy :- www.rbi.org.in

3 thoughts on “RBI’s Inflation Indexed National Savings Securities – FAQ’s”

  1. Hello Mr. Sridhar,

    The fixed rate is 1.5%.

    It makes no sense in investing in IINSS-C bonds. [inflation indexed national saving securities – cumulative].

    Taxes deflate inflation bonds. Interest will be taxable as ‘income from other sources’ not as ‘capital gains’ even if entire amount is received on maturity. [actually taxable each year unless investor opts for receipt basis.]
    Tax rate as per the investors tax slab.

    So FinMin [& CBDT] should move in to neutralize tax effect with further indexation as on maturity it will be treated as capital gains.

    If the FinMin idiotic view is there can’t be -‘indexation on indexation’! wrong.

    As of now sovereign wealth funds have shunned Indian tax free bonds! In spite of all the roadshows!?
    [Bonds of IRFC, IIFCL, NHAI, PFC, HUDCO, RECL] – 8.9% coupon rate offered.

    IINSS-C bonds should be on par with other capital indexed bonds. Inflation indexed does not mean capital indexed.

    On 5,000/- investment, 10% inflation, 30% slab, post tax return will be 7.94% i.e Rs 397.32/-

    Who would venture in these bond & lock for min 3yrs? [sr.citizens 1yr]

    The fixed rate should be min 2.25% if not 2.75%.

    OK we move from inflation bonds for the time being.

    RBI’s inflation comfort rate is 5%. Argument, it achieves in a year’s time, pre tax returns will be 6.5%, will FD rates be 4%?

    No sane person will touch these bonds.

    Regards,

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