Bond with the best

Dec 03 2013, 09:52 IST
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To protect households against negative returns on their savings, the Reserve Bank of India will launch retail inflation-index bonds in mid December. To protect households against negative returns on their savings, the Reserve Bank of India will launch retail inflation-index bonds in mid December.
SummaryNew retail inflation-linked bonds will be a lucrative option for household investors.

To protect households against negative returns on their savings, the Reserve Bank of India will launch retail inflation-index bonds in mid December. Investors can buy these 10-year bonds from banks and the interest rate on these securities will be linked to the final combined Consumer Price Index (CPI) with a three-month lag, plus 1.5%, compounded in the principal on a half-yearly basis and paid at the time of maturity.

The face value of one Inflation Indexed National Savings Securities-Cumulative (IINSS-C) security will be R5,000 and the minimum investment will be R5,000. An applicant can invest a maximum of R5 lakh in a financial year. These bonds can be pledged as collateral for loans from banks, financial institutions and non-banking financial institutions. Like relief or savings bonds, individuals, Hindu undivided families, charitable institutions registered under Section 25 of the Indian Companies Act and universities incorporated by central, state or provincial Acts or a university under Section 3 of the University Grants Commission Act can subscribe to these bonds.

It is mandatory for an investor to quote his or her permanent account number (PAN) if the investment amount is more than R50,000. A person who does not have a PAN will have to give a declaration in Form 60, as per Income Tax Rule 114B. While quoting PAN is not required for those who have only agricultural income and not any other income, the individual will have to give a declaration in Form 61. The RBI said the tax treatment on interest and principal repayment would be in line with the extant taxation provision, where investors will have to pay tax on interest and capital gains depending on their tax bracket.

Early redemption will be allowed after one year from the date of issue of the bonds for people above 65 years of age. For others, it will be three years from the date of issuance. Early redemption, however, will be subject to penalty charges at the rate of 50% of the last coupon payable and can be made only on the coupon dates. An individual can nominate one or more persons who will be entitled to the bonds and receive the payments in case of the original bondholder’s death.

The RBI circular has underlined that the final combined CPI with a lag of three months will be the reference CPI. For instance, the CPI for September will be used as reference for

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