What is Inflation Indexed Bonds ?
Inflation Indexed Bonds (IIB) are a category of government securities issued by the RBI which provides inflation protected returns to the investors.
These bonds have a fixed real coupon rate which is applied to the inflation adjusted principal on each interest payment date. On maturity, the higher of the face value and inflation adjusted principal is paid out to the investor. Thus, the coupon income as well as the principal is adjusted for inflation. The inflation adjustment to the principal is done by multiplying it with the index ratio.
The index ratio is calculated by dividing the reference index on the settlement date by the reference index on the date of issue of the security. The Wholesale Price Index (WPI) is the inflation measure that is considered for the calculation of the index ratio for these bonds.
Another category of inflation-indexed instruments issued by the RBI for retail investors is the Inflation-Indexed National Saving Securities-Cumulative 2013. These bonds of 10-year tenor were available to retail resident individuals, minors, HUFs, and charities among others.
The bond carries a fixed interest of 1.5% and an inflation rate calculated on the basis of the Consumer Price Index (CPI). The interest is compounded every six months and cumulated and paid with the principal on maturity. The fixed rate of interest will be the floor and will be paid even if there is deflation.
The interest is taxable according to the tax status of the investor.
The minimum investment was Rs.5000 and the maximum Rs. 500000 per applicant.
The bonds were issued in the form of a credit to the Bon Ledger Account (BLA) and a certificate is issued to the holder. The bonds are not listed or traded on the secondary markets and can be transferred prior to maturity only on the death of the holder to the nominees or legal heirs.

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