Mumbai: The Reserve Bank of India (RBI) on Friday issued a circular saying it is launching Inflation Indexed National Savings Securities-Cumulative (IINSS-C) for retail investors in the second half of December 2013. RBI said the aim is to protect savings from inflation, especially the savings of the poor and middle classes. We decode the product for you and here is what it means:
What’s on offer?
The face value of one IINSS-C security is Rs5,000. You will have to invest a minimum amount of Rs5,000. The maximum amount you can invest in a financial year is Rs5 lakh. The interest rate will be calculated at Consumer Price Inflation (CPI) rate plus a margin of real interest rate which will be a fixed rate. Right now it is real interest rate of 1.5% per annum. For instance, if CPI is at 10%, the IINSS-C will give you 11.5% returns (10%+1.5%). The interest will be compounded half yearly and the tenor for the product is 10 years. For instance, if you invest Rs5,000, assuming a CPI inflation rate is 10%, the interest accrued after six months will be Rs287.50 at an annual coupon of 11.5%. Assumed annual interest rate applicable at the end of the next six months, if CPI inflation rate is at 9.5%, will be 11%, then the interest accrued at the end of 12 months will be Rs290.80. Hence, the total value of investment at the end of 12 months will be Rs5,290.81. The CPI rate will be used as reference CPI with a lag of three months. For instance, final combined CPI for September 2013 would be reference CPI for all days of December 2013. RBI states that you can nominate 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. Non-resident Indians can also be nominees of these bonds. IINSS-C is eligible as collateral for loans from banks, financial institutions and non-banking financial companies (NBFCs). A Permanent Account Number is mandatory if you invest Rs50,000 and above.
What does it mean for you?
This is definitely a welcome product for retail investors. The interest is simple to calculate and gives returns above inflation which means your money is really growing. It is a highly safe investment and indexing it to CPI is the meaningful part as the ordinary investor will benefit from it. Since you get the bond through banks, it means that you will be able to access it easily. Remember that it is a long-term investment as you have to stay invested for at least 10 years. There is a lock-in period for the product. For senior citizens the lock-in period is one year and for other it is three years. RBI states that if redeemed 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.
Overall this is a good product with AAA rating and a sure above-inflation return. But there is no tax incentive. This means post-tax returns on a coupon of 11.5% for someone in the highest tax bracket will be around 8%. At the moment, tax-free bonds with AAA rating for 10-year maturity are slightly higher at 8.25%. Public Provident Fund gives 8.70% return in financial year 2014 which is tax free. Says Suresh Sadagopan, a Mumbai-based financial planner, “At 10% CPI, this product will give better returns than bank FDs (fixed deposits) right now. However, the interest rate will change every quarter. You can look at investing certain portion of your money in this.” This product will work out better than tax-free bonds if in the 10-year period inflation rises, since tax-free bond coupon is fixed but for this CPI-linked bond is linked to inflation and has an additional coupon of 1.5% on top of that.