The much touted Inflation Indexed National Savings Securities have failed to attract retail investors. The poor response is attributed to the lack of awareness, absence of tax benefits, and a fall in retail inflation.
According to a Finance Ministry official, the total mobilisation through this 10-year instrument, which was meant to be a hedge against inflation, has been around ₹100 crore.
In 2013, the Government issued two inflation-indexed products: Inflation Indexed Bonds for both retail and wholesale investors based on the Wholesale Price Index (WPI), and Inflation Indexed National Saving Securities-Cumulative for retail investors based on Consumer Price Index (CPI)-based inflation.
The official said that total mobilisation through both the instruments was around ₹6,000 crore — approximately ₹5,900 crore from Inflation Indexed Bonds and ₹100 crore from the latter. Though no target was set, the Government was hoping to mop up ₹20,000 crore from the two instruments.
The Inflation Indexed National Saving Securities — meant for individuals, Hindu Undivided Families, charitable institutions and universities — was launched on December 23, 2013, and scheduled to close on December 31. Individuals could invest from ₹5,000 to ₹10 lakh, and institutions between ₹5,000 and ₹25 lakh. The interest rate consists of two parts, a fixed rate of 1.5 per cent, and a floating rate that is based on CPI or retail inflation.
Because of the tepid response, the closing date was extended to March 31, 2014. But this has not helped either.
According to analysts, the absence of tax benefits in the scheme detracted individuals. There is no benefit available either on the principal investment or interest paid.
Tax effectNow, for the tax impact. Consider the CPI inflation in recent months and compound the rate of interest half yearly. The yearly return works out to 10.4 per cent at the end of March.
Post tax, this rate would be 9.3 per cent for individuals in the 10 per cent tax bracket, 8.3 per cent for those in the 20 per cent tax bracket, and 7.3 per cent for those paying 30 per cent.
In contrast, the interest rate for the 10-year National Saving Certificates (tax benefits on principal and on reinvested interest) for 2014-15 is 8.9 per cent, while on 15-year public provident fund (tax benefits on principal amount and no tax on interest) is 8.8 per cent. Similarly, the 10-year tax-free bonds offer around 8.5 per cent.
Another reason for the poor retail response could be the fall in inflation. In February, inflation came down to an over-two-year low of 8.1 per cent from 8.79 per cent in January.
Money collected through such instruments will be part of the Government’s borrowings.
The Finance Ministry, in consultation with the RBI, has decided to borrow ₹3.68-lakh crore between April and October, but it is yet to say how much of that will be from inflation-indexed certificates.
This year too the inflation indexed bonds will be on offer with added features to make it more attractive.