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 ?
Show answer
Answer: A. Statement 1 is correct: because the principal is protected against inflation, investors accept a lower coupon, so the government borrows more cheaply. Statement 2 is correct: returns move with inflation, protecting the real value of savings. Statement 3 is wrong: interest and capital gains on IIBs are taxable under normal income tax rules. So 1 and 2.
Watch for: Students confuse IIBs with tax-free bonds or Sovereign Gold Bond redemption gains, which do have tax benefits.
Why the other options are wrong
- B. Wrong because IIB income is taxable.
- C. Wrong because IIB income is taxable, so statement 3 fails.
- D. Wrong because statement 3 is incorrect.
Source to check: RBI FAQs on Inflation Indexed Bonds (rbi.org.in); Ministry of Finance press releases on IIBs (2013)
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.