NCD: Non Convertible Debentures

Meaning:

An NCD is a fixed-income debt paper issued by a company. In other words, the issuer agrees to pay a fixed interest on your investment. These debentures cannot be converted into shares of the issuing company like convertible debentures.

Secured/Unsecured:

An NCD can be both secured as well as unsecured. For secured debentures, which are backed by assets, in case the issuer is not able to fulfill its obligation, the assets are liquidated to repay the investors holding the debentures. Secured NCDs offer lower interest rates compared with unsecured ones.

Income Option:

If you want a regular income from NCDs, you can pick those that pay interest on a monthly, quarterly or annual basis. If you just want to grow your wealth, you can opt for cumulative option where the interest earned is reinvested and paid at maturity.

Benefits of investing in NCD:

  1. Liquidity:
    Listing of NCDs on exchanges like NSE & BSE provides liquidity to your investments

  2. No TDS:
    No tax Deducted at Source (TDS) on listed debentures

  3. Limited lock in period:
    Unlike FDs, NCDs have limited lock-in period which makes them attractive as far as liquidity is concerned

  4. Rating:
    Ratings by agencies like CARE, FITCH, CRISIL, ICRA enables you to assess the quality of debt papers before investment

  5. Flexibility:
    Option of holding bonds in 'Demat Form' makes your investments easy to handle & monitor

NCD Vs BANK DEPOSIT

If we talk purely in terms of interest rates, NCD is better than a bank fixed deposit because the interest differential is quite significant. But this higher interest rate comes at slightly higher risk.

Currently, bank fixed deposits are offering an interest of 9-10% for a tenure of one to five years. In contrast, the recent NCDs offered 11.75% to individuals.

TAX IMPLICATIONS

  • Held Till Maturity: Interest earned is added to the total income & taxed at marginal rate of income tax depending on the tax-slab you belong to.
  • Sold on exchange before one year: Short Term Capital Gains Tax at applicable rates depending on the tax slab you fall into
  • Sold on exchange before maturity but after one year: Long Term Capital Gains Tax at 20% with indexation & 10% without indexation
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