Non Convertible Debentures (NCD): Meaning, Taxation, Interest Rate, Example

Non-Convertible Debentures (NCDs) are fixed-income instruments where investors lend money to companies in exchange for regular interest payments and principal repayment at maturity. They are commonly used by companies to raise funds and by investors to earn stable returns.

What Are Non-Convertible Debentures (NCDs)?

NCDs are like loans you give to a company. In return, the company pays you interest regularly, every month, every three months, every six months, or once a year. When the NCD reaches its end date (called maturity), you get back the money you invested plus any final interest. 

Companies issue NCDs to raise capital for business needs, such as building factories or expanding operations. In India, these NCDs are regulated by the Securities and Exchange Board of India (SEBI), which ensures companies follow rules to protect investors. A debenture trustee, appointed by the company, also watches over the process to ensure investors are treated fairly.

Example: you invest ₹10,00,000 in an NCD with a 9% interest rate for 3 years; you could earn ₹90,000 per year and get ₹10,00,000 back at maturity

Types of NCDs

Non-Convertible Debentures (NCDs) are mainly categorized as secured or unsecured and can offer you either fixed or floating interest rates. They provide regular income payouts or a lump-sum return at maturity, with key variants that include callable and puttable options. 

Based on Security

• Secured NCDs: The company's assets are mostly used as collateral for these. If the issuer defaults, investors can get their money back by selling these assets, thereby reducing risk.
• Unsecured NCDs: Unsecured NCDs lack collateral and primarily depend on the issuer's creditworthiness. They are riskier, but they usually have higher interest rates than secured NCDs.

Based on Interest Payout

• Cumulative NCDs: Interest accumulates and is paid along with the principal at the loan's maturity.
• Non-Cumulative NCDs: Interest is paid regularly, such as monthly, quarterly, or annually.

Based on Interest Rate:

• Fixed-Rate NCDs: The interest rate remains fixed throughout the entire investment's tenure.
• Floating-Rate NCDs: The interest rate fluctuates in line with market benchmarks.

Based on Redemption (Call/Put Options):

• Callable NCDs: The issuer can redeem the debentures before maturity
• Puttable NCDs: The investor can ask the company to redeem the debentures before maturity.

Based on Registration:

• Registered NCDs: The company keeps a record of holders, and payments are made only to registered investors.
• Bearer NCDs: These can be transferred by delivery, and whoever holds them receives the payments.

NCDs are generally listed on stock exchanges to provide liquidity and have tenures ranging from 90 days to 10 years. 

Are NCDs safe?

Secured NCDs are relatively safer as they are backed by company assets, which can be liquidated to recover dues in case of default. While unsecured NCDs carry higher risk as they depend solely on the issuer’s creditworthiness and financial health, with no collateral protection.

Always check the credit rating (AAA being the safest) and the issuing company’s fundamentals before investing in any NCD.

Factors to Consider Before Investing in NCDs

Before investing, check these points to get a better understanding:

• Credit Rating: Choose companies with high Credit ratings (AA or AAA) from agencies like CRISIL or CARE. Higher credit ratings demonstrate that the company is financially strong and less likely to default in future.
• Debt Levels: Avoid companies with too much debt (more than 50% of their assets). High debt means higher risk.
• Capital Adequacy Ratio (CAR): Choose companies with at least 15% CAR, showing they have enough funds to handle losses.
• Non-Performing Assets (NPAs): Companies should set aside at least 50% of their assets for bad loans. This shows they manage risks well.
• Interest Coverage Ratio (ICR): A high ICR indicates the company can easily cover its interest payments, making it safer.
• Your Tax Slab: NCDs are more suitable for investors in lower tax slabs (10% or 20%), as higher tax rates can reduce overall returns.

Who Should Invest in NCDs?

• Secured NCDs: Best for people who want a safe, steady income, like retirees or cautious investors.
• Unsecured NCDs: Suitable for those willing to take more risk for higher interest.
• Not Ideal For: People in high tax slabs (30%) or those who need quick access to cash, as selling NCDs can be difficult.

How to Invest in NCDs

You can buy NCDs in two major ways, which are mentioned below:

• Public Issue: Companies announce NCDs, and you can apply through a bank or a broker. It’s first-come, first-served, so act quickly.
• Stock Market: After the NCD is issued, you can buy it from stock exchanges through a stockbroker.

To invest in NCDs, you need a demat account to hold them digitally, making transactions and tracking easy, and it also helps avoid TDS on interest.

Steps to Invest in NDCs

• Step 1: Open a Demat Account: A bank or broker can help you open a demat account.
• Step 2: Find NCD Issues: Check new NCD offerings on stock exchanges or consult your broker directly.
• Step 3: Buy NCDs: You can do this by applying during public issues or buying them on the stock market.
• Step 4: Monitor Investment: Regularly track the company’s performance and credit rating.

Benefits of Investing in NCDs

Here are the key benefits of investing in NCDs:

• Good Returns: NCDs offer interest rates of 7% to 10%, which are often higher than bank FDs, making them more attractive for investors seeking steady returns without taking on too much uncertainty 
• Regular Income: Investing in NCDs for the sake of regular income. You can get interest monthly, quarterly, yearly, or all at once (cumulative). These NCDs help investors like you who need money regularly, on a set periodic basis, for monthly expenses or other purposes.
• Tradable: NCDs can be sold on the NSE or BSE before maturity, offering flexibility, though prices may vary with interest rates and market demand.
• Low Risk for Secured NCDs: Secured NCDs are safe because the company's assets back your money. If something goes wrong and the company can't pay, those assets can be used to pay you what you owe. Many low-risk investors choose secured options over unsecured ones because they offer an extra layer of protection.

Corporate Fixed Deposits (FDs) vs NCD's

Tips for Safe NCD Investing

Before investing in NCDs, it’s important to follow a few simple checks to reduce risk and make informed decisions:

• Check the Purpose: Read the company’s offer document to understand why they issue NCDs. Avoid companies that don’t clearly explain how they will use your money.
• Spread Your Money: Invest in NCDs from companies with different maturity dates to lower risk.
• Avoid Risky Sectors: Don’t put all your money into a single sector, such as NBFCs that offer personal loans, as they can be risky.
• Buy Older NCDs: Older NCDs on the stock market may give better returns if bought at a lower price when new NCDs are issued.
• Sell Smartly: Sell your NCD when its interest is due, as this is when it’s most valuable in the market.
• Watch the Economy: Companies may struggle to pay in tough economic times, increasing the risk. In good times, NCD returns seem less attractive than stocks.

Risks of Investing in NCDs

Before investing, it’s important to understand the potential downsides involved:

• Company Risk:  If a company faces financial trouble, it may fail to pay interest or return your investment, especially with unsecured NCDs. Since there’s no collateral backing them, the risk is higher, making it important to check the company’s credit rating before investing.
• Interest Rate Risk: If market interest rates rise, your NCD’s market price might fall if you plan to exit early. Buyers prefer newer NCDs with higher payouts, so that older ones may lose value in trading. But if you're holding till maturity, none of those matters, as you’ll still get your promised returns.
• Risk of Inflation: When inflation rises quickly, the fixed interest from NCDs loses real value. The returns that look good today may not keep up with rising living costs. Because of this, your income stays the same, but your buying power slowly goes down.
• Selling Difficulty: This occurs when there aren't many buyers for NCDs, making it hard to sell. If demand is low when you want to sell, you might have to sell for less, which makes them more attractive to investors who can hold until they mature.

Features Of NCDs

Non-Convertible Debentures come with several key features that investors should understand before investing. These features include:

Taxation on NCDs 

The money you earn from NCDs is taxed in two ways:

• Interest Income: The interest you get is taxed as income from other sources; it is based on your income tax slab (10%, 20%, or 30%). 

For example:

• If you earn 9% interest (₹90,000 on ₹1,000,000) and are in the 20% tax slab, you pay ₹18,000 tax, so your take-home interest is ₹72,000.

The table below shows after-tax returns for different tax slabs:

Capital Gains: If you sell your NCD before maturity:

• Selling within 12 months (for listed NCDs): Short-Term Capital Gains (STCG) tax applies, based on your income tax slab.
• Selling after 12 months: The Long-Term Capital Gains (LTCG) tax is 12.5% (without indexation).

For cumulative NCDs (where interest is paid at maturity), the entire interest is taxed at maturity based on your tax slab. 

Example: If you invest ₹10,000 in a 3-year cumulative NCD at 9%, you will receive ₹12,709 at maturity. The interest (₹2,709) is taxed at your slab rate (e.g., 20% tax = ₹541.80).

Call and Put Options in NCD's

Some NCDs come with special features:

• Call Option:  The company can redeem the NCD before maturity, usually when interest rates fall.
• Put Option: You can sell the NCD back to the company at a predetermined price, offering an exit when needed.

Check if your NCD has these options before investing, as they affect your returns.

Recovery in Case of Default: If a company cannot pay, secured NCD holders can recover their money by selling the company’s assets with the help of the Debenture Trustee. Unsecured NCD holders must wait longer and may not get full repayment, as they have lower priority.

Green NCDs: Some companies issue NCDs for eco-friendly projects, like solar energy. If you care about the environment, look for these “green NCDs” from companies with good sustainability practices.

Understanding Yield to Maturity (YTM)

The interest rate (called the coupon rate) is not the whole story. If you buy an NCD at a price different from its face value (e.g., ₹9,800 for a ₹10,000 NCD), your actual return is called Yield to Maturity (YTM). 

YTM includes interest and any gain or loss from price differences. 

Example: Buying a ₹10,000 NCD at ₹9,800 with 9% interest for 2 years gives a YTM of about 9.5%, meaning you earn slightly more than the 9% interest.

Recent Trends: In FY 2024–2025, many Non-Banking Financial Companies (NBFCs) issued NCDs with interest rates of 8–9%, attracting retail investors. But new SEBI rules are making it harder for smaller NBFCs to issue NCDs, which limits investors' choices.

Costs to Know

Investing in NCDs involves small costs:

• Brokerage Fees: You may pay 0.5 - 1% when buying or selling NCDs on the stock market.
• Demat Charges: Annual fees for maintaining a demat account (₹300-₹1,000 depending on the broker). 

Conclusion

When you invest in secure options from reputable companies, NCDs provide a consistent income with minimal risk. Always check your finances before investing. Diversify your investments to achieve higher returns while accounting for your credit rating, debt levels, and financial health.