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What are inflation-indexed bonds? 

Currently, there is again talk that the government may introduce inflation-indexed bonds. These are bonds whose returns are linked to an inflation index. A mark-up is added to the inflation rate, and that is the interest rate paid to investors. 

Should you invest in them?

These bonds protect investors against inflation. Retirees invest a certain corpus at retirement, and then live off it for the next 20-30 years. When a large portion of the retirement corpus is invested in fixed income (and very little in equities), retirees find themselves waging a lose battle against inflation. By putting some portion of their retirement corpus in inflation-indexed bonds, they can protect themselves against inflation.  

However, the decision to invest should depend on the mark-up over the inflation rate these bonds will offer, their post-tax returns, liquidity, and how their returns compare with other fixed-income offerings.