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How is IINSS different from IIB?

Pursuant to the promise made by the Finance Minister in his budget speech last year, the Govt. of India first launched 'Inflation Indexed Bonds' (IIB) in mid-2013 and followed it up with the launch of 'Inflation Indexed National Saving Securities' (IINSS) in Dec 2013.

Though the objective of both the IIBs and IINSSs is to protect the investors against inflation, there are some significant differences between the two products.

1. IIB is primarily for the large institutional investors, whereas IINSS is targeted to the retail investors only with an investment limit of Rs.5 lakhs per year.

2. IIB is linked to the Wholesale Price Index (WPI) and IINSS to the Consumer Price Index (CPI).

3. IIBs have a fixed interest rate (arrived at 1.44% after following the book-building process). Interest rate on IINSSs is, however, floating and is equal to the 3-months prior CPI inflation rate + 1.5%.

4. In IIBs the interest is paid out every six-months, whereas in IINSSs it is cumulative in nature and payable only on maturity along with the principal amount.

5. IIB gets its inflation protection through floating principal. Based on the WPI movement, the principal amount of IIB is increased and the interest is paid on this inflation-adjusted principal. In IINSS the principal or the face value of the bond remains unchanged throughout its 10-year term.

6. In case of IIBs, at maturity you will receive back the inflation-adjusted principal. In IINSS you will get back the same amount that you had invested. 

7. IIB is listed. IINSS is not.

8. In IIBs the major portion of the returns comes in the form of capital gains and interest comprises only a small percentage. In IINSS there is no capital gains and as such the entire gain is in the form of interest income.

9. Since long term capital gains tax is 10%, IIB is more tax efficient for the investors in the higher tax brackets (as they would otherwise have to pay 20/30% tax on their interest income in IINSS). IINSS is more tax efficient for investors in the nil/10% tax bracket.

10. IINSS has the provision of early redemption. IIBs, on the other hand, can be sold in the secondary market if required. 

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