RBI has announced details of the much-awaited Inflation Indexed National Savings Certificates (IINSC) based on the Consumer Price Index (CPI) instead of the earlier Wholesale Price Index (WPI). IINSC is a far simpler product than the earlier Inflation Indexed Bonds (IIB) based on the Wholesale Price Index (WPI) issued in June 2013.

The earlier IIBs protected both capital and interest against inflation whereas the new IINSCs are simply a floating rate Bond to be issued by RBI where the interest rate will be floating and will be equal to the inflation rate plus 1.50% p.a. They are for 10-year period, where interest will not be paid but will be compounded every 6 months. This product is primarily meant for Individuals and HUFs. A limit of Rs 5 lakh per applicant per annum precludes very large applications.

So will Individuals take to this IINSC, unlike their tepid response to the earlier IIBs? First let’s take a look at the return. Assuming inflation remains constant at around 10%, the post-tax return on the Bonds for the entire period will be: those who pay 0%tax will get 11.50% return, 10.30% tax will get 10.32% return, 20.60% tax will get 9.13% and those who pay tax @ 30.90% will get 7.95%.

High tax-paying investors will also get a long-term capital loss for tax purposes in the year of redemption of the bond (whether early redemption or on maturity) which they can set off against any other long-term capital gains they may have in the year of redemption.

The interest payable on the bonds is taxable and TDS will be deducted unless the investor files the relevant tax form. As you can see the post-tax return is fairly attractive for those paying tax at lower rates and even for those paying tax at the highest rate, though a tad lower than what is available on tax-free bonds for 10 years tenure today, it is an attractive investment option for those high tax-paying investors who feel that inflation is likely to remain at elevated levels. If NRIs are allowed to invest (not clear from the rules published by RBI whether they will be allowed) then those NRIs who have no income chargeable to tax in India will find this instrument attractive as the post-tax returns for them will be good.

The issues with IINSCs arise with the lack of liquidity for 3 years (1 year for those above 65 years) and the high cost of early (in 5-6 years) redemption after that. As early redemption can be made only on two specific dates in a year is likely to lead to big procedural issues. As the interest is compounded every 6 months, hence there is no cash flow at all possible for 10 years unless you redeem early. In fact, most investors will have to pay tax from their pocket despite not getting the interest payment.

Not only liquidity, there are bigger issues as well such as process of buying and redeeming. It is proposed to be undertaken through the banks or Stock Holding Corporation of India (SHCIL) who will open what are called Bond Ledger Accounts (BLAs), which very few retail consumers currently have. Also, it is not known how cumbersome it is going to be to open such BLAs. More importantly, will the banks be adequately incentivised to open BLAs so that they may willingly undertake the sale of IINSCs which is bound to cannibalise to a great extent on their fixed deposit base. Unlike NPS, this product has no tax benefit also. The second big issue is post sale servicing —things like change of address, issuing of TDS certificates, updating tax deduction forms filed by investors and making sure that tax is deducted at source accordingly, nominations filed, changes in nomination, solving issues regarding early redemption, marking or unmarking of lien, transmission of the bonds in case of death of the investor, etc. is going to make or break this product eventually.

It is also not clear what safeguards will be taken to ensure that the limit of Rs 5 lakh per annum per applicant is not crossed and what procedural delays will be caused because of that.

All in all, a floating interest rate product (completely new concept in India) with procedural issues is unlikely to be a hit with the middle or low net worth investors towards which the product is ostensibly targeted. This lack of interest will be accentuated if the banks are not enthusiastic about their sale and servicing.

The relationship between man and money has always been a bitter-sweet symphony. Recently, a lot of Indian expats have been rejoicing at the rupee depreciation, which enabled them to send more money back home. While on the one side, expats are leveraging on the rupee debacle, on the other, there are these less fortunate ones, who are bearing the brunt of the global meltdown. Nonetheless, with the global economy getting bleak by the day, it is important to make hay while the sun shines. There has always been a lot of hype around savings and investment, but how many of us have been able to effectively put our hard-earned money to the right use?

Personal Finance — A rendezvous with your ka-ching!

Planning your financial future is one of the most important things you can do in your life. This should not be taken casually and there are many different aspects that should be examined. Your finances should be balanced, taking into account short-term as well as long-term goals. The first step is to carefully prepare a system which will help you to efficiently use the money. A start to this can be planning your finances by setting a monthly budget that includes expenses, savings, and investments. Having a fixed budget will help you stick to your plan to ensure future success.

Planning

Planning your finances well will do you a world of good in times of financial crunch that was not anticipated. Allocating your salary funds to expenditure, savings, investment channels accordingly will ensure that your hard-earned money is not spent haphazardly. Whether it is building a house in your hometown; sponsoring your children’s education or planning for an international holiday with your family, planning your finances will lead to smooth execution. Write down your goals and set a target date for the same viz. 3-year goals, 5-year goals and so on. This will help you to prioritise and save or invest accordingly.

Savings

Saving is important to acquire financial stability. Unfortunately, many of us are not aware of the techniques. Mid of last year, the RBI deregulated interest rates on Non Resident Ordinary (NRO) savings accounts and Non Resident External (NRE) term deposits. Subsequently, the RBI also freed up interest rates on the Foreign Currency Non Resident (FCNR) Account which resulted in a significant spike in interest rates on all these accounts. Some banks also offer you the option of availing Variable Recurring Deposits, which allow you to deposit monthly instalments of denomination of your choice which earns you attractive interest. Post Office Savings account scheme is also a safe option to choose from.

Spending

Living on a budget doesn’t mean you eat only two meals a day or walk 10 km instead of taking a Metro. A well thought out and realistic budget will help you understand your expenditure pattern and enable you to spend wisely. For example, allocate a day in a week/month for your grocery shopping. This will avoid any impulsive shopping that you may do during the week. While it is not suggested that you cut down on your hobbies, but ensure that you don’t overlook the frequent indulgence that can be avoided.

Investing

The house that cost a few hundred thousand rupees five years ago, costs a couple of crores today. So putting away your money in a box is not good enough. Investing in the right financial instrument is the key. Stocks, mutual funds, real state, gold and other commodities are some of the avenues, which can be explored. Even a good insurance policy viz. endowment, money back policy etc., have attractive pay-back options in regular intervals, which can fetch you money periodically.

Contingency cash

Life can sometimes be unpredictable and a substantial amount of liquid cash saves you from a lot of heart ache. For most of us, who live on a month on month pay-cheque, setting aside some cash for unexpected events will always be helpful. On an average, one must consider having three months of living expenses as contingency cash. Savings account and fixed deposits are places, where you can tuck away some cash.

Borrowing money

Sometimes, how much ever you plan your finances and be frugal on your expenses, there might be a day, where you will require money more than what you have in your bank. For example, a child’s marriage, buying a car or investing in a house is not only an important decision but also an expensive one. At such times, make use of financial aids provided by various institutions. Today, a plenty of nationalised and private sector banks offer loans. Having said that, ensure that you borrow for the right reasons and for a genuine investment and not for frivolous activities.

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