Perpetual Bonds Explained: How They Work and the Risks Involved

Key Takeaways: 

• No fixed maturity: Perpetual bonds pay interest indefinitely; principal return depends on a call option, not a guaranteed date. 
• AT1 bonds dominate India’s perpetual bond market, issued mainly by banks to meet Basel III capital requirements.
• Write-down risk is real. Yes Bank’s ₹8,415 crore AT1 write-off in 2020 proved these bonds can go to zero while equity survives.
• Under capital stress, the issuing bank can skip coupons without counting it as a default.

Perpetual bonds, also called “perp” or “forever” bonds, are debt investments with no maturity date. Unlike a regular bond that returns the principal amount on maturity, a perpetual bond remains outstanding indefinitely. 

These categories of bonds pay interest (the coupon) as long as they remain outstanding, and the issuer has no obligation to return principal to the investor (except for bonds with call options). This lets the issuer buy the bond back after a set period, commonly five or ten years, usually with regulatory approval. In practice, investors often treat the call date as the bond’s effective end date.

This unusual structure can make perpetual bonds attractive to investors looking for regular income. At the same time, they carry risks not typically found in conventional bonds, including interest-rate risk, credit risk, liquidity risk, and, in some cases, the possibility of coupon cancellation or principal loss. 

This blog covers everything related to perpetual bonds: what they are, how they work, the risks, and what returns you can expect. 

What is a Perpetual Bond?

Perpetual bonds have no predetermined maturity date and pay interest indefinitely. 

A conventional bond generally looks like this:

• You invest ₹10,000 in a bond with a five-year maturity. 
• The bond pays 8% annual interest.
• After five years, the issuer repays your ₹10,000 principal. 

However, a perpetual bond continues paying interest without a scheduled date for returning the principal.  

For example, say you invest ₹10,000 in a perpetual bond with a 9% coupon.

The annual coupon would be -

₹10,000 × 9% = ₹900

If the bond remains outstanding and the coupon is paid as scheduled, you could receive ₹900 every year. However, your ₹10,000 principal is not guaranteed to be returned at a specific time unless your bond has a call option attached. 

Note: The investor’s exact rights depend on the issue terms.

How Do Perpetual Bonds Work?

The basic mechanism is similar to other bonds: an investor provides funds to the issuer and receives interest according to the bond terms. 

What is missing is a maturity date. For these, it is generally written as December 31, 9999, meaning there is no maturity date 

A simplified structure looks like this:

Investor → invests money → Issuer → pays coupon → Investor

For a normal bond, the cash-flow cycle eventually ends when the issuer repays the principal.

For a perpetual bond:

Investor → invests money → Issuer → pays coupons periodically → continues indefinitely

The issuer may, however, have a call option that allows it to redeem the bond on specified dates, subject to applicable regulations and the terms of the issue.

Importantly, a call date is not the same thing as a maturity date.

If a perpetual bond has a first call date after five years, it does not necessarily mean the investor will receive the principal after five years. The issuer may choose not to exercise the call, subject to the instrument’s terms and applicable regulatory requirements.

Who Issues Perpetual Bonds?

Primarily, perpetual bonds are issued by 

• Banks (primary issuer)
• NBFCs (Non-Banking Financial Companies)
• Public Sector Undertakings (PSUs) 
• Financial Institutions 

Perpetual Bonds vs Regular Bonds

AT1 (Additional Tier-1) Bonds: India’s Main Perpetual Bonds

In India’s banking market, AT1 instruments are among the most important types of perpetual securities. Banks can issue Perpetual Debt Instruments (PDIs) and certain perpetual preference shares that qualify as Additional Tier-1 (AT1) capital under the Reserve Bank of India’s Basel III framework. 

AT1 bonds are part of the Basel III capital framework, designed to make banks more resilient and better able to absorb losses. Under the regulatory capital structure, banks maintain different layers of capital, including:

• Common Equity Tier 1 (CET1): The highest-quality form of bank capital, mainly common equity and retained earnings.
• Additional Tier 1 (AT1): Regulatory capital instruments that can absorb losses while the bank remains a going concern.
• Tier 2: A lower layer of regulatory capital that generally absorbs losses later than CET1 and AT1.

AT1 instruments are designed to absorb losses. Under specified regulatory triggers, regulators can write down their principal or convert it into equity. RBI’s framework also provides for loss absorption at the Point of Non-Viability (PONV).

SBI’s 2026 AT1 Issuance

In July 2026, SBI became the first Indian bank to issue Basel III-compliant AT1 perpetual bonds that year, as part of a board-approved ₹60,000 crore borrowing plan for the financial year. 

The bank allotted ₹4,691 crore of non-convertible, unsecured, perpetual AT1 bonds at a fixed coupon of 7.75%, with a five-year call option and a face value of ₹1 crore per bond. The issue opened and closed on the same day, with allotment completed the next day, a sign of how quickly institutional demand absorbed the offer.

The Yes Bank Precedent

The Yes Bank reconstruction in 2020 remains one of India’s clearest examples of the risks associated with AT1 instruments.

Under the RBI-backed Yes Bank Reconstruction Scheme, the bank’s Basel III AT1 instruments around ₹8,415 crore were permanently written off to zero, even as equity shareholders retained some value.

The episode demonstrated that AT1 securities cannot be treated like conventional bonds simply because they pay a stated coupon. Their regulatory loss-absorption features can expose investors to substantial or even total principal loss in a bank-resolution scenario.

Risks of Perpetual Bonds

The higher income offered by some perpetual bonds comes with additional risks.

• Write-down & conversion risk: 

This is the biggest risk for AT1 bonds. The regulator can order the principal to be written off or converted to equity if the bank is in serious trouble. 

This has happened: when Yes Bank was reconstructed in 2020, ₹8,415 crore of its AT1 bonds were written off. Bondholders lost their entire capital, while equity holders kept theirs. That is why AT1 bonds are known as loss-absorbing instruments.

• Coupon Skip / Deferral Risk

Under certain conditions, AT1 issuers can skip or defer interest payments if their capital levels fall below a threshold. Unlike ordinary bonds, missing a coupon here is not necessarily a default. 

• Market Price Can Fall Sharply

Even if the issuer continues to pay interest, a perpetual bond’s market value can fall.

For example, imagine you buy a perpetual bond with a 9% coupon for ₹1,00,000. Later, market interest rates rise, and newly issued bonds offer 11%. Your 9% bond becomes less attractive to new investors. As a result, its market price may fall below ₹1,00,000.

If you need to sell it before the issuer exercises a call option, you may have to sell at a loss.

This is known as interest-rate risk.

• Call Risk

Many perpetual bonds have a call option, allowing the issuer to redeem the bond after a specified period. This can work both ways for investors.

Suppose you purchase a perpetual bond at ₹1,000 with a 10% coupon. The issuer can redeem it after five years.

If interest rates have fallen and the issuer can refinance at a lower rate, it may choose to call the bond. You receive your principal back, but you may then have to reinvest the money at a lower interest rate.

On the other hand, if interest rates have risen, the issuer may have less incentive to redeem the bond. Therefore, investors should never assume that a bond will definitely be called on its first call date.

Taxation of Perpetual Bonds

In India, perpetual bonds (i.e., Additional Tier-1 or AT1 bonds issued by banks) are taxed on two legs: interest/coupon income and capital gains.

Interest/Coupon Income

• Taxation Head: The regular interest you get from perpetual bonds is treated as Income from Other Sources.
• Tax rate: Added to your total annual income and taxed at your applicable income tax slab rate.
• Tax Deducted at Source (TDS): For corporate perpetual bonds, TDS is generally at 10% if the annual interest payable is in excess of ₹5,000.

Capital Gains (Secondary Market Sale)

If you sell your perpetual bonds on the secondary stock exchange either before or without redemption, then any profit will be treated as a capital gain. The rate will be determined by your holding period:

• Short-Term Capital Gains (STCG): If held for 12 months or less, the gains are added to your income and taxed at your normal slab rate.
• Long-Term Capital Gains (LTCG): If held for more than 12 months, the listed bond gains are taxed at 12.5% (without indexation).

Who Can Consider Investing in Perpetual Bonds?

You can opt to invest in perpetual bonds if you:

• Have a large, diversified portfolio and can afford a riskier investment 
• Understand bank capital structures and call-option mechanics
• Are comfortable holding for a long time or accepting price swings

They are generally not suitable if you need capital protection, have a short investment horizon, or rely on steady, guaranteed income.

Conclusion

Perpetual bonds can provide higher income than many conventional fixed-income instruments, but investors give up some important protections in return. There may be no fixed repayment date, interest can be deferred or cancelled in certain structures, market prices can fluctuate, liquidity may be limited, and some regulatory capital instruments can expose investors to principal losses.

For this reason, perpetual bonds are generally better suited to investors who understand the bond structure and can tolerate higher levels of risk, rather than investors looking for guaranteed or predictable capital repayment.