What Are Perpetual Bonds?

23 Dec 2025

JM Financial Services

illustration showing Perpetual Bonds key features, advantages & risk

Perpetual bonds often sound confusing at first because, unlike regular bonds, they do not have a maturity date. Yet, they are actively issued and traded in India, especially by banks and financial institutions. For income-seeking investors, perpetual bonds can look attractive due to their higher interest payouts—but they also carry unique risks that should not be ignored.

In this article, we break down what perpetual bonds are, how they work, their advantages, risks, and whether they are suitable for retail investors.

What Are Perpetual Bonds?

Perpetual bonds, also known as perpetual securities or perpetual debt instruments, are bonds with no fixed maturity date. In theory, the issuer can keep paying interest forever without ever repaying the principal.

However, most perpetual bonds come with a call option, allowing the issuer to redeem the bond after a specified period (usually 5 or 10 years).

These bonds are commonly issued by:

Banks
Financial institutions
Large corporates

In India, they are frequently used by banks to meet Basel III capital requirements.

How Do Perpetual Bonds Work?

Investors receive regular interest (coupon payments), usually higher than normal bonds.
The principal amount is not returned unless the issuer exercises the call option.
The issuer has the right (not the obligation) to redeem the bond after the call date.
If not redeemed, interest payments may continue indefinitely, subject to conditions.

Unlike fixed deposits or traditional bonds, investors cannot rely on a guaranteed repayment timeline.

Key Features of Perpetual Bonds

1. No Maturity Date

There is no fixed date when the principal must be repaid.

2. Higher Interest Rates

Perpetual bonds typically offer higher coupon rates to compensate investors for the added risk.

3. Call Option

Issuers can redeem the bond after a predefined period, usually 5–10 years.

4. Interest Can Be Deferred

In certain cases, especially for bank-issued perpetual bonds, issuers can skip interest payments without being considered in default.

5. Subordinate in Nature

Perpetual bonds rank below senior debt in case of liquidation, making them riskier.

Why Do Banks Issue Perpetual Bonds?

Banks issue perpetual bonds mainly to:

Strengthen their Tier 1 capital
Comply with Basel III norms
Avoid diluting equity through fresh share issuance

For banks, these bonds act like equity from a regulatory perspective but like debt from an investor’s viewpoint.

Advantages of Perpetual Bonds

Higher yield compared to fixed deposits and traditional bonds
Regular income for long-term investors
Useful for portfolio diversification
Attractive during falling interest rate cycles

Risks Associated With Perpetual Bonds

1. No Guaranteed Principal Repayment

Since there is no maturity, investors may never get their capital back.

2. Interest Rate Risk

If interest rates rise, the market value of perpetual bonds can fall sharply.

3. Credit Risk

If the issuer faces financial stress, interest payments can be skipped.

4. Liquidity Risk

Perpetual bonds may not always be easy to sell in the secondary market.

5. Misleading “Bond” Label

Despite being called bonds, perpetual instruments behave more like high-risk debt or quasi-equity.

Are Perpetual Bonds Suitable for Retail Investors?

Perpetual bonds are not ideal for conservative investors. They may suit:

Investors seeking higher income
Those who understand credit and interest rate risks
Investors with a long-term horizon

They are not a substitute for fixed deposits or capital-protected instruments.

Perpetual Bonds vs Regular Bonds

Feature	Perpetual Bonds	Regular Bonds
Maturity	No maturity	Fixed maturity
Interest Rate	Higher	Lower
Principal Repayment	Not guaranteed	Guaranteed at maturity
Risk Level	High	Moderate
Issuer Flexibility	Very high	Limited

Taxation of Perpetual Bonds in India

Interest income is taxed as per the investor’s income tax slab.
Capital gains apply if sold in the secondary market.
No special tax exemption applies.

Final Thoughts

Perpetual bonds can enhance income, but they demand a clear understanding of risks. The higher interest rate is not free—it compensates for uncertainty around repayment, liquidity, and issuer discretion.

For most retail investors, perpetual bonds should form only a small portion of a well-diversified portfolio, preferably after consulting a financial advisor.

Frequently Asked Questions (FAQs)

1. Are perpetual bonds safe?

Perpetual bonds carry higher risk than traditional bonds due to no maturity date, subordinated status, and the possibility of skipped interest payments.