Inflation is a big headache for everyone. If you understand how inflation affects your finances, you know how it eats away your money.
Whenever you decide to invest your money, you would think about whether it can help you beat inflation and whether it is safe.
Did you know RBI offers a bond that does beat inflation and keeps your money safe? Let’s discuss this.
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Buckle up, here we go!
For starters, inflation refers to the increase in the prices of goods and services over time. Inflation can erode the purchasing power of your money, which means that the same amount of money can buy you fewer goods and services in the future.
To help you beat inflation, RBI and the Government of India (GOI) offer a range of investment products designed to protect your money against inflation and earn some real returns.
What are real returns?
Real return is the return you actually earn on your investment after accounting for the impact of inflation on your purchasing power. In other words, real return reflects the actual increase in your wealth over time.
For example, if an investment product, let’s say Fixed Deposit (FD) provides a return of 8%. At the same time, the inflation rate has been 7%. Then your real return on investment is just 1%.
That means your money grew by just 1%.
Now, as we said, RBI and GOI offer some investment products to beat inflation and grow your money. One such investment product is the Inflation Indexed National Saving Securities – Cumulative (IINSS-C) bond.
What are Inflation Indexed National Saving Securities – Cumulative (IINSS-C) bonds?
Launched in 2013 by RBI, the IINSS-C bond is a type of investment product designed to protect your investment against inflation.
They link these bonds to the Consumer Price Index (CPI). The CPI is a measure of the average change in the prices of goods and services consumed by households over time.
Some time back, we discussed inflation and CPI. You can check it out here.
Interest rate offered on IINSS-C
There will be two parts to the interest rate of IINSS-C.
The first is a fixed rate of 1.5% per annum, and the second is the inflation rate.
As the IINSS-C bonds are linked to the CPI, it means the bond’s interest rate is adjusted periodically to keep pace with inflation. And the interest rate is calculated once every six months based on the previous CPI rate.
For example, if the inflation rate during the six months is 6%, then the interest rate for that six months would be 6.75% (i.e. fixed rate – 0.75% and inflation rate – 6%).
Annually, if the inflation rate is 5%, you would receive an interest return of 6.5%.
Remember, the interest won’t be paid out until maturity. The interest will be accrued and compounded in the principal on a half-yearly basis and paid with the principal at the time of redemption.
Investment Tenure of IINSS-C
IINSS-C has a fixed tenure of 10 years. And yes, premature redemption is allowed.
For senior citizens above 65 years, premature redemption is allowed after one year. For others, it is allowed after 3 years.
They will charge a penalty at the rate of half of the last payable coupon for premature withdrawal. For example, if the last payable coupon is ₹1,000, they would charge ₹500 as a penalty.
Eligibility for investing in IINSS-C bonds
Only retail investors are eligible to invest in IINSS-C bonds.
The retail investors would include individuals, Hindu Undivided Family (HUF), charitable institutions and Universities.
Also, you can invest in IINSS-C bonds through SBI & Associates, Nationalised Banks, HDFC Bank, ICICI Bank, and Axis Bank.
The minimum investment limit is ₹5,000. The maximum limit is ₹10 lakh per annum for eligible individual investors and ₹25 lakhs per annum for institutions such as HUFs, Charitable Trusts, Education Endowments and similar institutions, which are not pro-profit in nature.
You can check for more details on RBI’s FAQ.
Tax benefits of investing in IINSS-C bonds
There are no tax benefits offered for investing in these bonds. The interest amount payable at redemption is taxable at your slab rate.
But yes, no TDS will be deducted.
Should you invest in RBI’s Inflation Indexed National Savings Securities – Cumulative (IINSS-C)?
On paper, earning a 1.5% interest rate above the inflation rate with no risk sounds great. But the reality is different.
By this, we don’t mean to say that these bonds are risky or RBI will default on the payments.
Our primary concern stands with the linking of CPI as the inflation rate. We have discussed before how CPI calculation can be outdated and how each of us has a different inflation rate based on our personal lifestyle here.
Plus, there are no tax benefits offered. If you fall in the 30% tax slab, you might not beat inflation post-tax.
Now it’s up to you whether you want to invest in it. You might be in a situation where investing in this bond can make sense, so think carefully before taking any decision.
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