Perpetual Bonds

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A perpetual bond is a bond without a maturity date. Also called Perps.

The issuer has the option to buy back the bond after a specific period. The call option is typically five years after the date of issue.

In India, perpetual bonds are listed on stock exchanges. Since the bonds have no maturity, the investor has to exit through secondary debt market in case of need.

These bonds are generally issued by large manufacturing companies or by banks to fund their long-term capital requirements. In banks, the perpetual bonds come under as Additional Tier 1 bonds which gives it features of Quasi Equity. Which Means that in case of bank winds up then the Investors in Perpetual bonds will be paid last but before equity investors.

These bonds carry liquidity risk, interest rate risk and credit risk.

The Annual coupon from the perpetual bonds will be added to the total income of the investor and taxed as per the Income tax slab one falls in.

But if the bond gets sold in the secondary market and Investor makes long-term capital gain (after holding period of 1 year), then the LTCG will be taxable at 10% (without Indexation).

The Interest and principal default risk in perpetual bonds are somehow curtailed by GOI ownership. You may find comfort in Nationalised banks being guarded by the Government of India.

The high yields on the Perpetual bonds are definitely attractive, but you need to look at it from the taxation perspective too. Post-tax interest is what you actually enjoy.

 

 

 

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