UPSC Previous Year Question | Prelims GS | 2022

With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"? 1. Government can reduce the coupon rates on its borrowing by way of IIBs. 2. IIBs provide protection to the investors from uncertainty regarding inflation. 3. The interest received as well as capital gains on IIBs are not taxable. Which of the statements given above are correct?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Answer

Correct Answer

1 and 2 only

Explanation

Statements 1 and 2 are correct: IIBs let government pay lower coupon rates and protect investors from inflation uncertainty. Statement 3 is incorrect: interest and capital gains on IIBs are fully taxable; there is no special tax exemption.

Topics: economy, government securities, inflation indexed bonds, inflation protection