I Bonds and TIPS: How Inflation-Adjusted Treasury Interest Is Calculated
October 29, 2026
Two US Treasury products protect savers against inflation. Series I savings bonds pay a rate that combines a fixed rate (set at purchase and unchanged for 30 years) with a variable inflation rate reset every six months. Treasury Inflation-Protected Securities (TIPS) pay a fixed coupon on a principal amount that rises with the Consumer Price Index.
The I bond composite rate = fixed rate + 2 × semiannual inflation rate + fixed rate × semiannual inflation rate. With a fixed rate of 1.00% and semiannual inflation of 1.5% (about 3% annualized): 0.0100 + 0.0300 + 0.000150 = 0.04015, rounded to 4.02% annualized. The numbers here are hypothetical; the actual rates are announced by the Treasury each May and November.
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You can buy up to $10,000 per person per calendar year in electronic I bonds through TreasuryDirect (plus up to $5,000 in paper bonds using a tax refund). Interest accrues monthly and compounds semiannually. You can't redeem during the first 12 months. If redeemed before 5 years, you forfeit the last 3 months of interest. Interest is exempt from state and local income taxes, and federal tax can be deferred until redemption or 30 years. If the inflation component is negative, the composite rate never falls below zero. With $10,000 at 4.02%, the first year pays roughly $402 before the 3-month penalty applies, and you can't redeem until the 12-month mark.
| Feature | I bonds | TIPS |
|---|---|---|
| Inflation protection | Variable rate resets every 6 months | Principal adjusts with CPI |
| Purchase limit | $10,000 per person per year (electronic) | No hard limit at auction |
| Taxes | Federal only; state-exempt; deferral option | Federal only; state-exempt; tax on inflation adjustments yearly |
| Liquidity | 12-month lockup; 3-month interest penalty before 5 years | Tradable at market prices |
| Price risk | None | Market value can fall if real yields rise |
How TIPS Work
Suppose you buy $10,000 of TIPS with a 1.5% coupon. If CPI inflation is 3% over the year, the principal adjusts to $10,300 and the interest is 1.5% × $10,300 = $154.50 (for the year; paid semiannually). At maturity, you receive the adjusted principal or the original principal, whichever is higher, so deflation can't reduce the repayment below the face value. The yearly inflation adjustment is taxable in the year it occurs even though you don't receive it until maturity (phantom income), so TIPS are often held in tax-deferred accounts.
Which to Use
I bonds suit small, long-term savings with the annual limit, and have no price fluctuation. TIPS suit larger amounts and retirement accounts, and can be held in funds. Both protect purchasing power, but the real return depends on the fixed rate or real yield. Compare with high-yield savings accounts and CDs after inflation. This article is educational, and the rates in the example are not current quotes.
Frequently Asked Questions
How is the I bond composite rate calculated?
Fixed rate + 2 × semiannual inflation + fixed rate × semiannual inflation.
What is the I bond purchase limit?
$10,000 per person per year electronically.
What is the penalty for early redemption?
Three months of interest if redeemed before 5 years.
How do TIPS protect against inflation?
The principal rises with CPI, and interest is paid on the adjusted principal.
What is phantom income on TIPS?
Taxable inflation adjustments you do not receive until maturity.