Do you spend a lot of time agonising over the prices of everything from potatoes to plane tickets? Here’s your chance to do something about it.

The Reserve Bank of India offers bonds pegged at retail inflation rates. March 31 is the last date to subscribe to these bonds.

These bonds pay a fixed number of basis points of interest above the prevailing rate of inflation, as captured by the Consumer Price Index.

How they work

These bonds have a mouthful of a name – Inflation Indexed National Savings Securities – Cumulative, or IINSS-C for short. The tenure of these bonds is 10 years. Interest will be compounded on half-yearly basis. The interest and principal are paid together at maturity.

The interest itself has two components. The first is the CPI inflation component, which will fluctuate. The CPI inflation considered will have a three-month lag. The second is a fixed real rate of 1.5 per cent per year. This fixed rate is added to the inflation rate to arrive at the total inflation.

Confused? For example, inflation in the six months ended January was 3.3 per cent. The total coupon on the bond works out to 4.05 per cent for six months (3.3 + 0.75 real rate).

The fixed component means that the minimum return on the bonds is 1.5 per cent for the full year. So in a deflationary scenario, though a very remote possibility, you will get 1.5 per cent return on the bonds.

Ifs and buts

If something is so good, investing in it can’t be easy. So these bonds are not available through your distributor or even on most online platforms. To invest in these bonds, you have to submit the application form at designated branches of SBI and its associates, other nationalised banks, Axis Bank, HDFC Bank, ICICI Bank, or offices of the Stock Holding Corporation.

One could either approach these institutions for the forms, or download them from the bank or RBI website. The minimum investment in these bonds is ₹5,000 and the maximum ₹500,000. You can withdraw investments ahead of maturity, but penalties apply. For those aged 65 and above, withdrawal is permitted after one year. For others, it’s three years. The penalty for getting out early is half the last payable interest.

Pros and cons

The main benefit of the bond is that you are assured of an above-inflation return. That the CPI inflation is considered a far more accurate reflection of the cost of living than the Wholesale Price Index is another advantage. Accruing and compounding of interest also results in better returns over the tenure of the bond instead of interest being paid out. Since these bonds carry a sovereign guarantee, they are free of credit risk.

But interest will be taxed at the applicable slab rate for these investments. To get an idea of the tax impact, take the past twelve months. Considering the CPI inflation in these months and compounding the interest half-yearly, the year’s return will work out to 10.4 per cent at the end of March. This dwindles to 9.3, 8.3 and 7.3 per cent post-tax for the 10, 20 and 30 per cent tax brackets, respectively.

What the yield will be once the IINSS-C matures depends on the trajectory charted by inflation during the period.

The other fixed income option with the highest degree of safety is a bank fixed deposit. With CPI inflation currently high, even after tax, returns on IINSS-C bonds can be better.

Currently, bank fixed deposits of over a five-year tenure offer 9 per cent interest on average. Post-tax, this works out to 8.3, 7.4 and 6.4 per cent for each respective tax bracket.

But bank interest rates are also dependent on RBI action to control inflation. It’s hard to judge how long IINSS-C returns will hold above bank deposit returns, especially with inflation cooling while interest rates continue to remain steady.

Even so, consider making some investments in these bonds to protect your portfolio against inflation, especially for those in the lower tax bracket. These instruments are not for generating superior returns.

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