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. As the name suggests, these debentures cannot be converted into shares of the issuing company like convertible debentures where investors have the option of getting shares in the issuing company on conversion.
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. 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.
Any Indian company can raise money through NCDs if it has a tangible net worth of at least Rs 4 crore and has been sanctioned loans by banks or financial institutions which is classified as ‘standard asset’ and not as bad debt.
Companies seeking to raise money through NCDs have to get their issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. NCDs with higher ratings are safer as this means the issuer has the ability to service its debt on time and carries lower default risk.
Difference between an NCD and an FD
- NCDs offer higher returns than FDs.
- NCDs, which are in demat form and are listed on an exchange, are not subject to TDS, unlike interest received from FDs which is taxable.
- NCDs are safer as they are backed by assets of the company. In case of a default, assets can be sold and money can be returned to the investor.
- NCDs are more liquid in nature when compared with FDs which attract penalty charges if funds are withdrawn before the maturity date.
Tax Implications
Interest earned through NCDs, if held until maturity, is clubbed with your income and taxed at your marginal income tax rate. If you sell your NCDs on the stock exchange before a year then you will have to pay short-term capital gains at income-tax rates applicable to you. If the debenture is encashed after one year but before its maturity, you will have to pay long term capital gains tax on the effective return at applicable rates.
Investing in NCD’s:
Investment in NCD’s can be made in two different ways:
- Application during IPO (Initial Public Offer)
- Purchasing existing NCD’s through stock markets.
For investing in NCD’s, demat account is required. One NCD unit values Rs 1000/- and multiples thereof. Average interest rates offered by NBFC’s are 10.5-11.5% p.a.