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. Statement 1: Inflation-Indexed Bonds (IIBs) pay a fixed real coupon rate plus the actual inflation rate. By removing the inflation risk premium that investors demand on nominal bonds, the Government might be able to offer a lower fixed real coupon rate compared to the nominal rate on conventional bonds, potentially reducing its overall borrowing cost under certain conditions. Thus, the statement that the Government can reduce the coupon rates (the real component) is plausible. This statement is correct. 2. Statement 2: This is the core advantage of IIBs for investors. Since the principal and interest payments are adjusted for inflation, IIBs provide protection against the uncertainty regarding inflation and the erosion of purchasing power. This statement is correct. 3. Statement 3: The tax treatment of IIBs in India is generally similar to other government securities. The interest received (both fixed and inflation-adjusted components) is typically taxable as per the investor's income tax slab. Capital gains on sale or redemption are also subject to tax. There is no general exemption making both interest and capital gains non-taxable. This statement is incorrect. 4. Since statements 1 and 2 are correct, the correct option is (A).