AT1 Perpetual Bonds in India (2026): The Coupon Isn't Guaranteed, and Neither Is Your Principal

By Nitish Bharadwaj · Published Sep 17, 2026 · 7 min

Additional Tier-1 (AT1) bonds are perpetual bank capital instruments with no maturity date and a coupon the issuing bank can skip entirely at its own discretion without defaulting. A write-down clause activates if the bank's core capital ratio falls below RBI's threshold, or regulators declare it non-viable. Yes Bank's 2020 reconstruction wrote off ₹8,415 crore of AT1 bonds to zero — including ₹466 crore held directly by retail investors — while equity shareholders kept some value, a case still before the Supreme Court. SEBI has since barred direct retail purchase below a ₹1 crore ticket.

AT1 bonds have historically carried a coupon 1.5-3% above comparable government securities, and that extra yield is exactly why they keep getting sold to individual investors as a smarter alternative to a fixed deposit. They aren't one. A bank can skip the coupon entirely at its own discretion without that counting as a default, the bond has no maturity date it's obligated to honour, and India's own Yes Bank case showed regulators can write the entire principal down to zero while equity shareholders keep something. Here's what an AT1 bond actually is, and why the Supreme Court is still deciding a case about one six years later.

What 'Perpetual' Actually Means

Additional Tier-1 (AT1) bonds are capital instruments banks issue to meet Basel III regulatory capital requirements — they count toward a bank's core Tier-1 capital precisely because they behave more like equity than debt when the bank comes under stress. 'Perpetual' means there's no fixed maturity date at all. Issuers typically build in a call option, commonly at 5 or 10 years, letting the bank choose to redeem the bond — but a call is an option for the issuer, never an obligation. If a bank's capital position is under pressure, it can simply skip the call and keep the bond outstanding indefinitely, leaving the investor holding an instrument with no fixed date on which their money comes back.

The Coupon Isn't Guaranteed Either

Unlike a regular corporate bond or NCD, where a missed interest payment is a default, an AT1 bond's coupon is discretionary by design — the issuing bank can skip it entirely in any given year without triggering any default classification, even while it remains fully profitable and continues paying dividends to shareholders. RBI's framework ties this discretion to the bank's Common Equity Tier 1 (CET1) ratio: once CET1 falls below 8% of risk-weighted assets, the bank can start cutting its AT1 coupon payout in stages — by 20%, 40%, 60%, or entirely — well before the bank is in any real danger of failing.

The Real Risk: Write-Down at the Point of Non-Viability

The feature that separates AT1 bonds from every other retail-accessible debt instrument is a built-in loss-absorption clause. If the bank's CET1 ratio breaches 6.125% of risk-weighted assets, or the regulator formally determines the bank has reached its Point of Non-Viability (PONV), the AT1 bonds can be written down partially or fully to zero, or converted into equity — as specified in the bond's own terms. This can happen well before any formal liquidation, and it inverts the usual seniority order investors expect: equity holders can retain some value even as AT1 bondholders, who are supposed to rank above them, are wiped out completely.

Why Most Retail Investors Hold These Through a Mutual Fund, Not Directly

After the Yes Bank episode exposed how many retail investors held AT1 bonds without fully understanding the write-down risk, SEBI barred direct primary-market purchase of these bonds by individual investors below a ₹1 crore ticket size — effectively pushing retail access almost entirely through debt mutual fund schemes instead, where a fund can hold a basket of such bonds within a regulated exposure limit. SEBI also caps how much of a debt scheme's assets can sit in AT1 bonds combined across issuers, and separately forced fund houses to value these bonds far more conservatively than before — using a 100-year assumed maturity rather than the bank's own call date, which stops a perpetual bond from being priced in a fund's NAV as if it behaves like a short-duration instrument. For how a debt fund's other holdings get taxed, see our debt mutual fund taxation guide.

Checking Whether Your Debt Fund Holds Them

• Open your debt fund's monthly factsheet and check the portfolio holdings list for AT1 or 'Perpetual Bond' entries against specific bank names — this is disclosed, just easy to skip past
• A high running yield relative to comparable duration debt funds is often a sign the fund is picking up extra return from AT1 or similar instruments, not just interest-rate positioning
• Credit-risk and corporate bond funds are far more likely to carry meaningful AT1 exposure than a pure gilt or banking-and-PSU fund — our gilt mutual funds guide covers a genuinely lower-risk alternative for the same broad debt-fund category
• Concentration matters more than the SEBI cap alone suggests — a fund near its exposure limit in a single weaker bank's AT1 bonds carries more real risk than one spread thinly across several stronger issuers

AT1 bonds exist to give banks a cheaper, equity-like buffer against failure — for the investor holding one, that buffer is exactly the risk being priced into the extra coupon. If a bond or NCD sold on the strength of its yield turns out to have no fixed maturity and a coupon the issuer can skip at will, the questions to ask are simple: is it AT1, and does the bank's current CET1 ratio have any real cushion above 6.125%. Our corporate bonds and NCDs guide covers how to check an instrument's actual structure before buying it on yield alone.