What are Non-Convertible Debentures (NCD): Meaning, Benefits, Risks, Taxation, & More
- Farheen Mukadam
- Sep 9
- 8 min read
Companies issue debentures, which are long-term financial securities, to raise additional capital from investors. Since it typically lacks collateral, it is heavily reliant on the issuer's reputation and creditworthiness. Large corporations primarily issue debentures to raise money at a set interest rate with no security. Different kinds of debentures exist, such as convertible and nonconvertible debentures. Debentures that allow the holder to convert them into shares of the company after a specific time are known as convertible debentures. Conversely, NCD denotes that debentures do not offer the holder any such choice when they mature.
Table of Contents
What are Non-Convertible Debentures (NCDs)?
NCDs are comparable to loans made to businesses. In exchange, you receive interest from the business on a regular basis, such as every month, every three months, every six months, or annually. You receive your investment back plus any accrued interest when the NCD matures, which is the end date. Businesses issue NCDs to raise capital for projects like expanding businesses or constructing factories. The Securities and Exchange Board of India (SEBI), which oversees these NCDs in India, makes sure businesses abide by regulations to safeguard investors. The corporation appoints a Debenture Trustee to oversee the procedure and guarantee that investors receive equitable treatment.
Types of NCDs
Secured NCDs: Being supported by the company's assets makes secured NCDs safer. These assets may be sold to recover your money if the business is unable to pay you back. On the other hand, secured NCDs have cheaper interest rates.
Unsecured NCDs: Since they are not backed by business assets, higher risk are a part of unsecured NCDs. You could have to wait longer to receive your money if the business doesn't pay. Higher interest rates offered by these debentures offset the risk.
Features of NCDs
Through open market public issuance, companies provide non-convertible debentures that interested investors can purchase within a predetermined time frame.
Since non-convertible debentures lack security, only creditworthy corporations are permitted to issue them. Credit rating agencies routinely rate even the NCD debentures.
For the most part, interest rates are set. The interest rate and the company's creditworthiness are inversely correlated. Interest rates will be relatively lower for NCDs with a high credit rating.
Both growth-based and interest-based or cumulative options are available for all non-convertible debentures to generate returns. Interest rates on secured NCDs could be higher compared to unsecured ones.
Who Should Invest in Non-Convertible Debentures
Secured NCDs: Ideal for retirees or cautious investors seeking a reliable, secure income.
Unsecured NCDs: Ideal for people who are prepared to assume greater risk in exchange for greater interest.
Because selling NCDs might be challenging, this product is not recommended for people in high tax slabs (30%) or those who require immediate access to cash.
Factors to Consider When Investing in Non-Convertible Debentures
Credit Rating: Choose businesses that have received excellent ratings (AA or AAA) from organisations such as CARE or CRISIL. A corporation with a higher rating is more financially stable and has a lower default rate.
Debt Levels: Steer clear of businesses with excessive debt (over 50% of total assets). Risk increases with debt levels.
Non-Performing Assets (NPAs): This demonstrates the company’s stance on risk management.
Capital Adequacy Ratio: Select businesses with a capital adequacy ratio (CAR) of at least 15%, as this indicates that they have sufficient capital to absorb losses.
Interest Coverage Ratio (ICR): A high ICR indicates that the business is in a position to pay interest on its loans, which increases security.
Your Tax Slab: Since taxes lower your returns in higher tax slabs, NCDs are excellent for those in smaller tax slabs (10% or 20%).
Benefits of Investing in Non-Convertible Debentures
Compared to most bank FDs, NCDs typically offer annual interest rates between 7% and 10%. Investors seeking consistent profits with less volatility may find that additional yield appealing. It's a method of increasing income without making riskier investments.
Purchasing NCDs in order to generate consistent revenue. Interest can be paid on a monthly, quarterly, annual, or cumulative basis. This makes them good for investors seeking regular income.
You have flexibility by being able to sell NCDs on stock marketplaces (such as the NSE or BSE) before they mature. NCDs are appropriate for investors who require early access to their money because of this liquidity feature.
By including NCDs with equities or savings, you can reduce your overall risk. They provide fixed returns that aren't influenced by changes in the stock market. This diversification aids in portfolio balancing during periods of market uncertainty or bearishness.
Secured NCDs offer assurance that your money will be repaid by the company's assets. Therefore, such assets may be taken to pay what you owe if the business is unable to make payments. Many low-risk investors like secured options because of this additional layer of safety.
Risks of Investing in Non-Convertible Debentures
Particularly with unsecured NCDs, the business might not be able to pay the interest or reimburse your money if it experiences financial difficulties. Therefore, it is crucial to verify the company's credit rating before making an investment.
If you want to sell your NCD early, the market price may decline if market interest rates increase. Older NCDs may lose value in trade because buyers want younger ones with larger rewards. However, none of that matters if you're holding till maturity because you'll still receive the returns that were promised.
Your NCD's fixed interest may lose real value if inflation increases quickly. A return that seems reasonable now might not be able to keep up with the rising living expenses. Their purchase value may therefore subtly decline while your income remains constant.
It might be challenging to sell NCDs because there aren't always enough buyers in the market. You may have to accept a lower price if there is little demand at the time you wish to go. The investment is ideal for those who are able to hold NCDs till maturity.
How to Invest in NCDs
NCDs can be purchased in two ways:
Companies announce NCDs at a public issue, and potential investors can get them through a broker or bank. Be quick because it's first-come, first-served.
A stockbroker can help you purchase the NCD from stock exchanges once it has been issued.
To invest, you must have a demat account, which is similar to a bank account. This account stores NCDs, which facilitates tracking, purchasing, and selling. You are exempt from TDS on the interest if the NCD is in a demat account.
Tips for Investing in NCDs
To learn why the company issues NCDs, see the offer document. Steer clear of businesses that don't provide a proper explanation of how they plan to use your money.
To reduce risk, purchase NCDs from businesses with varying maturity dates.
Never invest in one area, rather seek diversification to spread the risk.
Buying older NCDs on the stock market us a good idea as they could yield higher returns if picked at a discount.
In difficult economic circumstances, businesses may find it difficult to make payments, which raises the risk. NCD returns appear less alluring than stock returns during prosperous times.
Taxation on NCDs
NCDs can be taxed in the following ways
Interest Income
Depending on your income tax slab, the interest on NCDs is taxed as "income from other sources”. After-tax returns for various tax slabs are displayed in the table below:
Interest Rate
| After Tax (10% Slab)
| After Tax (20% Slab)
| After Tax (30% Slab)
|
9% | 8.1% (Rs. 81000) | 7.2% (Rs. 72000) | 6.3% (Rs. 63000) |
9.5% | 8.55% (Rs. 85500) | 7.6% (Rs. 76000) | 6.65% (Rs. 66500) |
10% | 9% (Rs. 90000) | 8% (Rs. 80000) | 7% (Rs. 70000) |
Capital Gains
If you sell your NCD before it matures, you will get capital gains.
Depending on your income tax level, the Short-Term Capital Gains (STCG) tax is applicable if you sell within a year.
Without indexation, the Long-Term Capital Gains (LTCG) tax rate is 12.5% on selling after a year.
When interest is paid at maturity, your tax slab will determine how much interest is taxed at maturity.
Conclusion
If you select secured NCDs from reputable organisations, they are an excellent way to get a consistent income with a modest level of risk. Prior to investing, always verify the company's financial condition, debt levels, and credit rating. To make informed decisions, allocate your funds among several NCDs and keep an eye on market developments.
Frequently Asked Questions
What is an example of a non-convertible debt?
Assume that a business issues an NCD with 9% yearly interest for three years. This type of debt is non-convertible, which means that it cannot be converted into company shares at a later time. After three years, you receive your money back plus interest.
Is it good to invest in NCD?
Yes, if you're willing to lock in your money for a few years and want a consistent income, it might be a decent option.
How do I earn returns from NCDs?
You make money by receiving interest on a monthly, quarterly, or annual basis. You also receive your entire investment once the NCD reaches the maturity period.
Can non-convertible debentures be sold?
It is possible to sell listed NCDs on stock exchanges such as the NSE or BSE prior to their maturity. However, the price may increase or decrease based on the state of the market.
Is NCD better than FD?
Depending on your objective, yes. Although they are slightly riskier, NCDs typically offer greater interest rates than fixed deposits. NCDs may be a good option for you if you want higher returns and are willing to retain them till maturity.
Can I withdraw NCD before maturity?
It cannot be broken like a fixed deposit, but it can be sold on the market if it is advertised. Even if the price might not be in your favour, you might leave early if there is demand.
What are the costs of investing in NCDs?
Investing in NCDs has some expenses. These are:
Broking fees: When purchasing or disposing of NCDs on the stock market, you might have to pay between 0.5% and 1%.
Demat Charges: Depending on the broker, demat account maintenance costs range from Rs. 300 to Rs. 1,000 per year.
What are the recent trends in NCDs?
Retail investors were drawn to NCDs with 8–9% interest rates offered by numerous Non-Banking Financial Companies (NBFCs), such as Bajaj Finance, in the 2024–2025 fiscal year. However, smaller NBFCs are finding it more difficult to issue NCDs due to new SEBI regulations, which could limit investors' options.
How can investors recover their money in case of default by NCD-issuing companies?
With assistance from the Debenture Trustee, holders of secured NCDs may recoup funds by selling the company's assets in the event that it is unable to make payments. Due to their lower priority, unsecured NCDs holders may not get full repayment and have to wait longer.
What are Green NCDs?
With assistance from the Debenture Trustee, holders of secured NCDs may recoup funds by selling the company's assets in the event that it is unable to make payments. Due to their lower priority, holders of unsecured NCDs may not receive full repayment and may wait longer.
What are call and put options in NCDs?
Certain NCDs have unique characteristics:
Call Option: In the event that interest rates decline, the corporation may choose to repurchase the NCD prior to its maturity. Your earnings may be limited as a result.
Put Option: If necessary, you have the opportunity to leave the company by selling the NCD back to them at a predetermined price.
Before investing, find out if your NCD offers these options, as they have an impact on your profits.
What is Yield-to-Maturity (YTM)?
The coupon rate, also known as the interest rate, is only one aspect of the situation. Your actual return is known as Yield to Maturity (YTM) if you purchase an NCD at a price that differs from its face value (for example, Rs. 9,800 for a Rs. 10,000 NCD). Interest and any profit or loss from the price difference are included in YTM. For instance, purchasing a Rs. 10,000 NCD at Rs. 9,800 with 9% interest for two years yields a yield-to-maturity (YTM) of almost 9.5%, which indicates that you make a little more than the 9% interest.
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