More relief for investors in inflation-indexed bonds

Consumers can expect further relief on investment in inflation-indexed bonds. The government may exempt tax on the interest accruing on such bonds giving more money in the hands of investors, according to official sources.

This is being done after the government and the Reserve Bank of India received feedback from stakeholders, most of whom expressed concerns over the interest which is taxable as per the present norm.

Inflation-indexed bonds give returns that are more than the rate of inflation ensuring price rise does not erode the value of investors' savings. Removing interest component from tax will imply that the interest is also treated as part of income.

Interest rates on these bonds are linked to the consumer price index (CPI) and will have two components—a fixed rate of 1.5 per cent per annum and an inflation rate based on CPI.

The 10-year bonds have face value of Rs 5,000 and investment in the bonds is capped at Rs5 lakh per applicant per year. Early redemptions are allowed  three years from date of issue. For senior citizens, it can be done after one year. Early redemption has penalty of  50 per cent of the last coupon payable. 

The bonds received tepid response from investors since they were launched last year. The government subsequently extended the date to March 31. The authorities are also considering increasing subscription limits for individuals, charitable trusts and HUFs to make the bonds more attractive.