UPSC Prelims 2022 Question:

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?

Explanation:

• Inflation-Indexed bonds, or IIBs, are securities designed to help protect investors from inflation. IIBs are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation. Government can reduce coupon rates on its borrowing by way of IIBs. So, statement 1 is correct.
  
  

• An inflation-indexed bond protects both investors and issuers from the uncertainty of inflation over the life of the bond. So, statement 2 is correct.
  
  

• Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds. So, statement 3 is not correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics| Inflation