UPSC Prelims 2022 · GS Paper I
Question 5: Economy and Social Development
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 ?
AnswerUPSC’s answer is (a).
An inflation-indexed bond links principal or interest to an inflation index, so investors are shielded from inflation uncertainty. Because they do not need an inflation-risk premium, the government can offer a lower coupon. There is no tax exemption on IIBs: interest is taxable and capital gains are taxed under the normal rules. So advantages 1 and 2 hold; statement 3 does not.
- 1. Investors need no inflation-risk premium, so the coupon can be lower.
- 2. Returns rise with inflation, which protects the investor.
- 3. Interest and capital gains on IIBs are taxable, not exempt.
How you could have got this
- If you were sure statement 3 is not correct, (b), (c) and (d) go: each of them includes 3.
What you needed to know: Interest and capital gains on IIBs are taxable, not exempt.
Only (a) is left. You didn’t need statements 1 or 2.
Which options go is worked out from UPSC’s key and the options, not by a model.
Why each option is right or wrong
- (a) Correct. Lower coupon for the government and inflation protection for the investor.
- (b) Wrong. Statement 3 is false, since IIB income is taxable.
- (c) Wrong. Statement 3 is false; statement 2 is true and is missing here.
- (d) Wrong. It includes statement 3, which is false.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2022, General Studies Paper I, Series A. The paper on upsc.gov.in.