at 11.2 per cent even they were to come down to levels of 8-9 per cent, investors of these bonds will earn 9.5-10.5 per cent pre-tax due to the fixed rate of 1.5 per cent over and above the inflation and therefore is significantly superior to fixed deposits.
Details of the product
The 10-year bonds are meant for investing only by retail investors — individuals, Hindu Undivided Family and charitable institutions — and investors can invest a minimum of Rs 5,000 while the investment amount can go up to Rs 5 lakh per investor.
The product offers interest in two parts — the inflation rate and a fixed rate of 1.5 per cent. It has been structured in a manner that even if the inflation goes into negative, investors will continue to get 1.5 per cent which is a fixed rate. The fixed rate of 1.5 per cent will be paid six monthly and investors will get the compounding benefit on the six monthly interest.
At the time of redemption they will get both the principal and the compounded interest rate. The inflation rate for a month will be based on the combined CPI of the month preceding three months.
For example, if the inflation rate has to be seen for the month of December 2013, the combined CPI for September 2013 will be used as the reference CPI.
Investors can invest through one of agency banks (SBI & associates, nationalised banks, HDFC Bank, ICICI Bank and Axis Bank) or even through the Stock Holding Corporation of India (SHCIL). On receipt of payment the bank will register the investor on RBI's web platform and generate a certificate of holding.
The securities, however, will be held by RBI that will act as the central depository.
Among other features, the product also allows premature withdrawal facility to investors. While investors can go for a premature redemption at the end of the third year, senior citizens above the age of 65 can do so only after one year of investment. This, however, will attract a penalty and it will amount to half the coupon paid in the last year.
While the bonds can be redeemed prematurely, investors can also use them to seek loans from banks and financial institutions by providing them as collateral and therefore it provides that liquidity.
Tax-free vs IiNSS-c?
While IINSS-C is set to be launched later this month, it will coincide with the subscription period