The proposed inflation-indexed bonds are likely to make a debut this month with the Reserve Bank of India and the finance ministry finalising the structure of these instruments. Further, the tax treatment of these bonds is also being debated in order to ensure sufficient retail participation.

With its eye firmly on attracting retail investors, the finance ministry is likely to index the principal on these instruments to the wholesale price index. To help determine the coupon rate, the ministry plans to hold an auction for institutional investors, before the bonds are launched for the retail segment.

?An auction will enable us to get response from the market on what they perceive to be the interest rate on these bonds. This will ensure that it is attractive enough to wean away retail investors from instruments like gold by providing them real returns that do not get eroded by inflation,? said a senior government official, adding that the bonds are likely to have a 10-year maturity.

In the interim, the department of economic affairs is also in talks with the department of revenue to finalise the tax treatment of these bonds. ?Investments in these bonds will be under the 80C limit of the Income Tax Act. The principal will be tax free but returns will be taxed,? the official said.

Announced as part of the Union Budget 2013-14 by finance minister P Chidambaram, inflation indexed bonds are expected to incentivise the household sector to save in financial instruments rather than buy gold.

?I propose to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates,? the minister had said at the time. Accordingly, the finance ministry plans to issue such bonds worth Rs 15,000 crore in this fiscal.

?The RBI is in talks with market dealers to get their response and will soon decide on the structure of these bonds,? the official said.

INVESTING HOUSEHOLD SAVINGS

* Finance ministry is looking at indexing the principal on the bond to the wholesale price index

* In order to determine the coupon rate, the ministry plans to auction the bonds to institutional investors before launching it in the retail segment

* Experts feel sovereign bonds would bring in more transparency for credit rating agencies and strengthen the rupee

* The bonds are likely to be brought under Section 80C of the Income Tax Act, where the principal would be tax free but the interest earnings would be subject to tax

* The bond was announced in the Union Budget 2013-14 to channel household savings away from gold.