Perpetual Bonds
Investors can rest easy knowing there is no dearth of investment options at their disposal. They can choose from different assets and markets and invest their capital based on their risk profile and expectations of return at a particular point in time. Debt instruments are among the most popular in India, amounting to a massive 67% of the GDP (gross domestic product).
What are Perpetual Bonds?
A perpetual bond, or a perp bond, is an irredeemable bond with a perpetual fixed income. In other words, it is a bond with no maturity date and cannot be redeemed. The purpose of a perpetual bond is to earn regular interest income perpetually, i.e. Therefore, these bonds do not have a maturity date or a maturity value.
Like dividends from equity shares, perpetual bonds also indefinitely provide regular income. Therefore, perpetual bonds are sometimes considered a part of equity, and their prices are determined akin to equity shares. Moreover, perpetual bonds create a perpetual debt obligation for the issuer, only in name, as the issuer does not have to repay the amount.
Why invest in Perpetual Bonds in India?
An investment in a perpetual bond is a guaranteed way to earn a fixed income. The secured income is usually for a more extended period since such bonds lack maturity feature. Not to mention, the return on investment on such bonds is more than other investment tools available in the market.
Here are the three primary reasons to invest in a perpetual bond:
Fixed Income Opportunity
Such bonds are the primary source of earnings for an investor looking for a source of fixed income. Such investment does not have any maturity. Hence, the interest earned from a perpetual bond is repetitive.
Increased Yield
Investing in perpetual bonds in India is acknowledged as an investment that provides higher returns. Such returns are in the form of interest. As a perpetual bondholder, you can receive interest forever as coupon payments.
Perpetual Bonds Taxes
The annual perpetual bonds coupon are added to the total income of an investor and then taxed accordingly, as per the Income Tax slab. However, if the investor earns a long-term capital gain (after a holding period of 1 year) while the bond is sold in the secondary market, then tax is applicable.
The long-term capital gains tax will be levied at 10% minus indexation.
Note: Due to the rise in inflation, investors are stepping back from the equities market to a more secure fixed source of income. Long-dated perpetual bonds with higher yields are the preferred option for such investors.
What You Need To Know Before Investing in Perpetual Bonds
With time, perpetual bonds have gained popularity among individual investors. However, there are certain risks involved that you need to know before investing in such bonds.
Redemption Uncertainty
A perpetual bond is an exclusive investment that varies from other kinds of fixed-income products and where redemption is an uncertain element.
The redemption usually happens with the consent of the issuer, however, it is influenced by certain market factors like present bond price, interest rate level, bond structure, etc.
Lack of Voting Rights
The majority of perpetual bonds are considered equity, according to accounting standards. It is because coupons are paid out periodically, and redemption is not guaranteed.
The holders of bank equity or company can vote on matters that need shareholder input. However, bondholders do not enjoy such privilege, even with perpetual bonds.
Subordinated Nature of Perpetual Bonds
The superiority of a bond evaluates the priority where investors are repaid if an issuer defaults or moves into liquidation.
Equity products and fixed income can be categorized as per their repayment priority, and the senior secured bonds are entitled to get paid first during liquidation or bankruptcy.