The correct option is 1 and 2 only because Inflation-Indexed Bonds (IIBs) are designed to provide a real return to investors, as the coupon payments and principal are adjusted for inflation, thus offering protection against the erosive effects of inflation (statement 2). This feature enables the government to lower the coupon rates since investors are assured of inflation-adjusted returns, making borrowing cheaper for the government (statement 1). However, statement 3 is incorrect because the interest income from IIBs is taxable in most jurisdictions, which includes India. This nuanced understanding of IIBs is crucial for grasping their role in managing government debt while safeguarding investors' purchasing power in an inflationary environment.