Inflation Indexed bonds….how TIPS works
The government keeps talking about Inflation Indexed bonds – we are not clear when it will come. We have no clue as to how it will be structured in India.
However this is how it should work if they do a cut and paste from the US – TIPS is the US product. Principally this is how it will work – the numbers are of course imaginary. I am not talking about Income tax, tds, etc. I am also assuming that it will be a straight one time payment of interest and not as a bi annual payment (that complicates yield calculation)….
Let us say the bonds are issued for Rs. 1000 each and carry 5% interest rates. In the first year you will be paid Rs. 50 as interest. Let us say the inflation in the first year of your holding the bond is 10%…then the PRINCIPAL VALUE of the bond becomes 1100.
Again the interest rate remains fixed at 5% – and that will be paid on the ADJUSTED PRINCIPAL VALUE …Rs. 1100. This means you will get Rs. 55 as interest.
In the next year if the INFLATION is 5%, the bond value will go up to 1155. The interest paid will be 5% of 1155…..
If the finance ministry does not have any ego…they should cut n paste from TIPS….not sure what they will do….
Knowing the greed of the government, they will make the interest taxable – thus beating the purpose OR worse they will do a TDS on the appreciated amount. Say they introduce a phantom capital gain on the amount by which the bond is incremented every year…..OMG the Americans do that…..
Ashal Jauhari
As we know Mr. Chiddu (the FM) over the years, we can safely assume the way, he is planning to implement it. 🙂
Mahesh
And to top it, one of the analyst on the idiot-box gave a fantastic idea to Mr. chidu.
The bond remain of 1000 over the years. The interest paid is linked to inflation :). So if the inflation is 10% you get 100. and if it’s 5% you get 50.
Fantastic 🙂
Yogendra Patil
Dear Subra,
Do you have any opinion on Inflation Indexed Bonds launched in December 2013 ? The date is extended till 31st March 2014.
Thanks,
Yogendra