Correct Option (a):
Statement 1 is correct. Inflation-Indexed Bonds (IIBs) inherently provide protection against inflation. This feature allows the government to offer a lower fixed coupon rate on these bonds compared to conventional bonds, thereby reducing its overall borrowing costs.
Statement 2 is correct. IIBs are structured to safeguard investors from inflation risk. Both the principal amount and/or the interest payments are linked to a specified inflation index, such as the Wholesale Price Index (WPI) or Consumer Price Index (CPI). This indexing mechanism ensures that the real value of the investment is preserved, mitigating the uncertainty regarding future inflation.
Incorrect Options:
Statement 3 is incorrect. The interest income and capital gains accrued from Inflation-Indexed Bonds are subject to taxation under the prevailing provisions of the Income Tax Act. There are no specific exemptions granted for these instruments. Therefore, options including statement 3 are factually incorrect.