With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)”?1. The 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?
✓ Correct answer: a) 1 and 2 only
ExplanationStatements 1 and 2 are correct : Inflation-Indexed Bonds is a debt market securities offered by the government to protect the savings from inflation and offer positive real rates of returns.Since Inflation-Indexed Bonds (IIBs) provide inflation protection to investors, the government can offer these bonds with lower coupon rates compared to traditional bonds.The inflation adjustment compensates for the lower fixed interest.Statement 3 is incorrect : The existing tax provisions will be applicable on interest payment and capital gains on IIBs.There will be no special tax treatment for these bonds.304
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