With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"? 1. Government can reduce the coupon rates on its borrowing by way of IIBs. 2. IIBs provide protection to the investors from uncertainty regarding inflation. 3. The interest received as well as capital gains on IIBs are not taxable. Which of the statements given above are correct ?

QUESTION

Medium

Economy

Prelims 2022

With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"?

Government can reduce the coupon rates on its borrowing by way of IIBs.
IIBs provide protection to the investors from uncertainty regarding inflation.
The interest received as well as capital gains on IIBs are not taxable.

Which of the statements given above are correct ?

Select an option to attempt

Explanation

Statement 1 is correct. Inflation-indexed bonds (IIBs) typically offer a fixed real rate of return above inflation. Therefore, the coupon rates on IIBs are adjusted based on changes in inflation to maintain the real rate of return.

Statement 2 is correct. Inflation-indexed bonds (IIBs) provide investors with protection against inflation because their principal and interest payments are adjusted based on changes in the inflation rate. This helps investors preserve their purchasing power.

Statement 3 is incorrect. Tax exemption Currently, the interest income on IIBs is taxable in India. Capital gains tax treatment on IIBs might depend on the specific holding period and type of investor.

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