Bonds indexed to retail inflation finally became reality in India after long wait. Following are the major highlights of the bond and it's merits and demerits.
National Savings Securities - Cumulative, is an inflation indexed bond which tracks consumer inflation and not wholesale inflation.
These bonds seek to protect people's savings from price rise, by offering returns over and above inflation at the retail level (Consumer Price Inflation).
Only retail investors can purchase these bonds with minimum investment size of Rs 5,000.
The interest rate is the sum of the prevailing inflation based on the combined consumer price index (CPI) and a fixed rate of 1.5 per cent annually.
Interest on the bonds will not be paid out but compounded on a half-yearly basis.
The bond is of 10 years tenure and premature redemption is allowed only after one year for investors above 65 years, and after three years for other investors.
The major drawback of this bond is that the tax on interest will also reduce your returns significantly specially if you are in the highest tax slab. For instance with 10% CPI inflation the return on you investment would be 11.5 (10 + 1.5). After taxes, the 11.5 per cent pre-tax return on the bond will fall to 10.3 per cent in the 10 per cent slab, 9.2 per cent in the 20 per cent slab, and 8.0 per cent in the 30 per cent slab.