Perpetual bonds offer steady, predictable income in India

dubai - They are a good investment opportunity when interest rates are falling

Q: Interest rates are falling in India, especially in the case of fixed deposits of banks and private companies. Is it possible to invest in long-term bonds which give a fixed rate of income? I have heard something about perpetual bonds. Please explain.
- C.R. Laxman, Sharjah

A: Perpetual bonds are like any other fixed-income instruments but with no date of maturity. At the time of its issuance, the terms for repayment are set out through a call option which may be after five or 10 years to give investors an option to exit. In some cases, the perpetual bond incorporates the 'step up option', which means that if the bond is not redeemed in a certain time frame, the issuer will pay a higher rate of interest. Both private and public sector banks issue these bonds. The public sector banks use them to augment Tier-I capital. These bonds are issued at a face value of Rs1 million per bond.

The bonds are listed on the stock exchange and can be bought and sold through a demat account. These bonds generally have a higher coupon rate compared to the benchmark 10-year government securities. Therefore, these bonds assure a steady and predictable income over a prolonged period of time and are a good investment opportunity when interest rates are falling.

Q: Will agricultural produce be liable to the Goods & Services Tax as and when it is introduced? My family in India has substantial agricultural income from plantations.
- S. Vardarajan, Doha

A: In the proposed Goods & Services Tax law, the definition of an agriculturist is incorporated. The reason is that certain select farm items will be brought within the GST net throughout India. The farmers will not have to register to pay the tax, but buyers of agricultural produce will pay the tax on reverse charge basis. Some cash crops are expected to be subject to this tax at a low rate.

The definition of an agriculturist is an individual or Hindu Undivided Family who undertakes cultivation of land by his own labour or labour of his family members or by hired labour under personal supervision or supervision of any family member. The GST Council has given the new definition which is incorporated in the Bill to be passed by Parliament and state legislatures.

Q: I want to make sure that there is no dispute among my children and family members after my death. Some have advised me to set up a trust and put all my assets in it. Will the trust be liable to pay tax on income arising from assets and will my family members have to pay tax when they receive the amount from the trust?
- K.D. Shetty, Bahrain

A: Family trusts are used as a tool for succession planning because they act as a deterrent to possible future disputes among family members, including challenges to a will made by the deceased. Family trusts also ring-fence assets from future liabilities. The person settling assets upon trust must ensure that the beneficiaries are determinate and known on the date on which the trust is set up and that the share of each beneficiary is clearly specified in the deed of trust executed by the settlor.

Trustees will have to pay tax on the income earned from the assets settled upon trust in their capacity as an association of persons. They will have to file a return of income every year, pay the tax and distribute the income among specified beneficiaries in the ratio mentioned in the trust deed. Where the beneficiaries are relatives of the deceased settlor, there would be no further tax payable by the relatives when they receive their share of income.

The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policies.