RBI - Inflation Indexed National Savings Securities (IINSS)

 

RBI - Inflation Indexed National Savings Securities (IINSS)
The Reserve Bank of India has recently  announced the launch of  a bond  called Inflation Index National Savings Securities, the return of the bond is closely linked to Consumer Inflation  Index . The central bank has announced details of a deposit whose interest rate is linked to the consumer inflation in India. The bank has said that this new instrument, called the Inflation Indexed Na tional Savings Securities (IINSS), will offer an interest rate of 1.5 per cent per annum while the principal amount--on which the interest is paid--will keep rising up every month in step with inflation.
This is definitely a good investment opportunity for  retail investors to hedge their investment against inflation.  This bond is promised to  gives returns above inflation which means your money will be growing in real terms. That means the inflation adjusted returns will be always positive when compared to traditional bank or similar types of deposits.  This bond is   guaranteed and  highly secured  investment option.  The main highlight of this bond is indexing it to CPI (Consumer Price Index ) is the important  part as the ordinary investor will benefit from it. These bonds are planning to distribute through bank branches and easily accessible to  each and every eligible investors.  This is a long term investment for 10 years and if you redeem in between some penalties are applicable, for senior citizens the lock in period is one year and others 3 years. RBI states that if the bond holder redeem the bonds before maturity, the penalty charges will be at the rate of 50% of the last coupon payable for early redemption. Hence, if you redeem before 10 years and after the lock-in, then there is a penalty. In absolute terms, it may not be much but if you consider the current rate of CPI inflation (10%) the charge could be at least 5% of your invested value—5% assuming that 50% of the last coupon payable refers to the actual value of the coupon.
  • Eligible Investors – The eligible investors for these bonds 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). The above proposed eligible investors in these bonds are the same as in the Relief/Savings Bonds.  
In  my opinion NRI are also eligible to investment in this bond (need more clarification)
 
When we compare this bond with earlier issued  Inflation Indexed Bonds (IIBs) both these instruments are aimed at providing a hedge against inflation. For the earlier IIBs, the return was linked to the wholesale price index (WPI). The return on the IINSS-C is linked to the consumer price index (CPI). Since it is the CPI inflation that impacts us significantly, this offers a better hedge against inflation.  However, the CPI inflation used in this case will be a final (new) combined CPI reference that will be decided by the RBI, and so may be somewhere in between the WPI and CPI.  The final combined CPI reference will be taken with a lag of three months (four months for IIBs). The rate of interest will be 1.5 per cent (1.44 per cent for IIBs) plus the inflation rate. Interest will be compounded annually and paid at the time of maturity.   In the case of IIBs, the principal is adjusted for inflation, and then the interest is paid half-yearly.
 
The related RBI Circular is given  below for your quick reference
 
The Reserve Bank of India, in consultation with Government of India, has decided to launch Inflation Indexed National Savings Securities-Cumulative (IINSS-C) for retail investors in the second half of December 2013.
These securities are being launched in the backdrop of announcement made in the Union Budget 2013-14 to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes.
The distribution/sale of IINSS-C would be through banks. Interest rate on these securities would be linked to final combined Consumer Price Index [CPI (Base: 2010=100)]. Interest rate would comprise two parts - fixed rate (1.5%) and inflation rate based on CPI and the same will be compounded in the principal on half-yearly basis and paid at the time of maturity. Early redemptions will be allowed after one year from the date of issue for senior citizens (i.e. above 65 years of age) and 3 years for all others, subject to penalty charges at the rate of 50% of the last coupon payable for early redemption. Early redemptions, however, will be made only on coupon dates.
The date of issuance for subscription would be announced shortly. The details of the product design and other operational issues are furnished in the Annex. The issuance of non-cumulative Inflation Indexed National Saving Securities for retail investors will be examined in due course.
Alpana Killawala
Principal Chief General Manager
Press Release : 2013-2014/1101
Annexure
Inflation Indexed National Saving Securities- Cumulative (IINSS-C)
Product design
  • Face value of one security - `5,000 (Rupee five thousand) and minimum investment - `5,000 (Rupee five thousand).
  • Maximum investment - `500,000 (Rupee five lakh) per applicant per annum.
  • Rate of interest (per annum) –real interest rate (fixed rate) + inflation rate.
    • Real interest rate – 1.5% per annum and the same will act as floor.
    • Compounding - Half-yearly
  • Tenor - 10 years.
  • Inflation- final combined CPI will be used as reference CPI with a lag of three months (i.e. final combined CPI for September 2013 would be reference CPI for all days of December 2013). In case of change in the base year, the base splicing method will be used.
  • Early Redemption - after one year from date of issue for senior citizens above 65 years of age and 3 years for all others. The penalty charges at the rate of 50% of the last coupon payable for early redemption. Early redemptions to be allowed only on coupon dates.
  • Nomination - A sole holder or a sole surviving holder of these bonds, being an individual, may nominate one or more persons who shall be entitled to the bonds and the payment thereon in the event of his death. The Non-Resident Indians (NRIs) can also be nominee of these bonds.
  • Form of Securities: These securities will be issued in the form of Bond to be held in the Bond Ledger Account (BLA) and all the provisions of Government Securities Act, 2006 shall be applicable.
  • Transferability - limited to nominee(s) on death of holder [only individuals].
  • Collateral - eligible as collateral for loans from banks, financial Institutions and Non-Banking Financial Companies, (NBFC).
Tax Treatment
  • Tax treatment on interest and principal repayment would be as per the extant taxation provision.
  • The quoting of Permanent Account Number (PAN) mandatory for investment amounting to `50,000 (Rupee fifty thousand) and more. However, following exemptions with regard to PAN requirement will apply:
    • As per Income Tax Rule 114B, any person who does not have a PAN and who enters into any specified transaction shall make a declaration in Form No.60.
    • As per Rule 114C, the requirement of PAN is not applicable to the person who has agriculture income and does not have any other income provided he makes a declaration in Form 61, non-residents as referred to in Section 2(30) of the Income Tax Act, and Central Government, State Government and Consulate Office.
Further, section 206AA of Income Tax Act 1961 on requirement to furnish PAN would be applicable.
Eligible Investors
  • The eligible investors for these bonds 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). The above proposed eligible investors in these bonds are the same as in the Relief/Savings Bonds.
Issuance/ Distribution
  • These bonds would be sold/ distributed through all agency banks, including Stock Holding Corporation of India Ltd (SHCIL) in the form of Bond Ledger Account (BLA). The BLA for each applicant will be maintained in the centralised depository on the RBI’s portal (E-Kuber).
  • The banks, including SHCIL, would act as interface for all customer services related to these bonds (such as receipts, repayments, recording change of address, nomination, transfer, early redemption, lien marking, etc.).
Note: Please note that this is not an investment recommendation, this is just for the general awarance of the readers
05-Dec-2013
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