Sinking Fund

Tax Glossary Definition

Sinking Fund

A sinking fund is a dedicated reserve that an organization maintains to accumulate money over time for the repayment of long-term debts, such as bonds or loans. By regularly setting aside fixed amounts, the company ensures it can meet its repayment obligations without financial stress at maturity. This practice reduces the risk of default and strengthens investor confidence in the company’s financial stability.

Example: For instance, if a firm issues ₹10 crore in bonds maturing in 10 years, it may contribute ₹1 crore annually to a sinking fund so that the total amount saved can be used to repay bondholders when the bonds mature.

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