Bankers have sought clarity from the Finance Ministry regarding taxation of additional tier-I bonds through which they are expected to raise capital to meet Basel III norms.

Clarity on taxation would help investors in putting money into such instrument without hesitation.

Banks have requested the Ministry to clarify tax treatment issues with regard to additional tier-I bonds in a meeting held recently, sources said.

Sources said bankers in the meeting said that investors want to know whether these instruments will be treated as bonds or equity for taxation purposes.

Under the Basel-III norms, additional tier-I bonds come with loss absorbency features meaning that in case of stress, banks can write off such investments or convert them into common equity if approved by the RBI.

This will help banks to conserve capital at the time of stress or loss.

Additional Tier I bonds, which qualifies as core capital or equity capital, is one of the means of raising capital by the public sector banks which would require Rs 2.40 lakh crore by March 2019.

Besides, investors also want clarity if they have option to exit such an investment after a few years.

Only few banks, including Bank of India, have raised funds through this instrument.

Some of the regulators, including pension regulator (PFRDA), have also raised issues on the taxation structure of these bonds.

However, PFRDA recently permitted pension fund managers to invest in Basel III compliant Tier I bonds of banks.

"It is hereby clarified that additional Tier I bonds compatible under Basel III issued by scheduled commercial banks in accordance with the RBI guidelines are to be considered as debt instruments eligible for investments under the debt category of all NPS schemes provided they are rated as investment grade by at lease one rating agency," PFRDA had said in a notification.

Tier I bonds are instruments which are perpetual in nature and therefore are akin to shares.