Months in the making, the Reserve Bank of India has finally launched consumer inflation linked bonds. Going under the moniker of 'Inflation Indexed National Saving Securities - Cumulative' (a mouthful, if ever), these bonds had been the subject of much anticipation. Alas, the fine print finds them come up woefully short.
The biggest stumbling block is tax treatment. In most countries with such bonds, the formulation goes broadly thus: pay the investor a nominal interest rate on face value while letting the FV float in line the linked inflation index. It is a simple structure that pivots on gains from the inflation-driven FV increases, which are accounted as capital gains from the taxman's lens.
To take a line from the fabled Maggi sauce commercial, the IINSS is different. It has been structured as a bond paying interest, the rate of which is pegged to the Consumer Price Inflation index. By implication, the entire interest earned qualifies as income, to be taxed at the marginal rate. To be fair, if only the inflation-compensating portion been subject to capital gains, it could have benefited from indexation. Clearly Fin Min and or RBI thought otherwise.
Several sticky points other than taxation come up too. The typical desi fixed-income investor, mostly given to income, may not line up in droves for the compulsorily cumulative IINSS. To boot, the lock-in period itself is rather long at 10 years. Such an extended tenor may only accentuate inflation and interest rate uncertainties that scare away investors. Early exit is possiblle, but only after 3 years, and with a penalty. Finally, there is an unfathomable 500K investment cap. All told, I don't see investors being inexorably drawn to IIMSS (versus, say, infrastructure bonds with friendlier format and better post-tax return.)
Be those as they may, one could still have rooted for distribution success. We know only too well that, in the Indian context, financial products need to be activey sold (occasionally with little correlation to merit, ULIP being case in point). I wouldn't hold my breath for this though: these bonds are to be sold only via banks, and their low commission structure is unlikely to be incentive enough there.
Perhaps I am being overly cynical. Maybe IINSS is a step forward, but it could have been so much more. Certainly, days into his tenure, our rockstar RBI Governor had himself talked the big game as to it's market-making potential. At least on that count, if not more, this is an ahem.
The biggest stumbling block is tax treatment. In most countries with such bonds, the formulation goes broadly thus: pay the investor a nominal interest rate on face value while letting the FV float in line the linked inflation index. It is a simple structure that pivots on gains from the inflation-driven FV increases, which are accounted as capital gains from the taxman's lens.
To take a line from the fabled Maggi sauce commercial, the IINSS is different. It has been structured as a bond paying interest, the rate of which is pegged to the Consumer Price Inflation index. By implication, the entire interest earned qualifies as income, to be taxed at the marginal rate. To be fair, if only the inflation-compensating portion been subject to capital gains, it could have benefited from indexation. Clearly Fin Min and or RBI thought otherwise.
Several sticky points other than taxation come up too. The typical desi fixed-income investor, mostly given to income, may not line up in droves for the compulsorily cumulative IINSS. To boot, the lock-in period itself is rather long at 10 years. Such an extended tenor may only accentuate inflation and interest rate uncertainties that scare away investors. Early exit is possiblle, but only after 3 years, and with a penalty. Finally, there is an unfathomable 500K investment cap. All told, I don't see investors being inexorably drawn to IIMSS (versus, say, infrastructure bonds with friendlier format and better post-tax return.)
Be those as they may, one could still have rooted for distribution success. We know only too well that, in the Indian context, financial products need to be activey sold (occasionally with little correlation to merit, ULIP being case in point). I wouldn't hold my breath for this though: these bonds are to be sold only via banks, and their low commission structure is unlikely to be incentive enough there.
Perhaps I am being overly cynical. Maybe IINSS is a step forward, but it could have been so much more. Certainly, days into his tenure, our rockstar RBI Governor had himself talked the big game as to it's market-making potential. At least on that count, if not more, this is an ahem.
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