Bank Fixed Deposits are one of the most favored financial products in India. The main reason for this popularity is that the depositor can get assured and fixed return on his investment.
Are there any other investment options that can offer better fixed return of say 10%-12% on your Investment? A 10-12% fixed return is a very tempting offer to resist right??
Non-Convertible Debentures (NCDs) generally offer returns in the range of 8% to 12%. For example, the upcoming NCD Public issue of Muthoot Finance which will be open for subscription (from 11th April, 2017) is offering Interest rates of around 9% (for retail investors). For more details, kindly read my article @ ‘Muthoot Finance April 2017 NCD Issue – Review‘.
Many companies like Muthoot Finance, Shriram City, IFCI, Manappuram, National Housing Bank etc., have raised funds by issuing NCDs in 2014-15.
So, what are these Debentures? What are NCDs? How to buy the best NCD? What are the tax implications on Non-Convertible Debentures? Tax-Free Bonds Vs NCDs, which one is a better option?
What is a Debenture?
Debenture is a type of Debt instrument which offers a fixed rate of interest for a specified tenure. Companies or governments use debentures to borrow money. Debentures are simply loans taken by the companies and do not provide the ownership in the company.
Bonds and Debentures have lot of similarities, both offer fixed interest rate and they have fixed tenure. But, bonds can be more secured than debentures. For this reason bond holders receive a lower rate of interest when compared to Debentures coupon rates. Bonds (Ex – Tax Free Bonds) are mostly issued by Government firms / entities.
What are NCDs?
Debentures are of two types Convertible and Non-Convertible. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate.
An NCD can be Secured or Unsecured. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation unlike unsecured NCDs.
Additionally, NCDs may have Put or Call options. If a company issues a ‘Callable Bond’, it means that it can be redeemed by the Issuer (company) before the bond’s maturity. The issuer can call away the bond if it is issued in a high interest rate environment and the rates fall subsequently. A bond with a ‘Put option’ works in exactly the opposite manner, wherein the investor can sell the bond to the issuer at a specified price before its maturity if the interest rates go up after the issuance and the investor has other, higher-yielding investment options.
How to buy NCDs?
- Public Issue:During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested. Also, you can make an investment online through your Demat Account.
- Secondary Market:NCDs bonds are listed on NSE or BSE or at times on both after the Public Issue. You can invest in these bonds through your trading account like the way you invest in shares. (But do note that NCDs have liquidity risk. Even if NCD get listed, low volumes can deprive investors of any opportunity in exiting prematurely.)
- You have to provide PAN details to the issuer of NCD.
- NRIs can invest in NCDs provided the company issuing NCDs allows them to invest in it.
Checklist to buy best NCD (Non Convertible Debentures)
How to select best NCD bonds? Below are the important factors that need to be considered before investing in a NCD public issue.
- Credit Rating– Credit rating of an NCD is a third party assessment of the quality of bond in terms of its credit performance. Some of the leading credit rating agencies in India are CRISIL, ICRA, and Fitch. It is advisable to buy NCD which have good Credit Rating. These ratings can be AAA (good rating), AA+, AA & AA-. Lower the rating, higher would be the interest rate.
- Coupon Rate – The rate of interest offered by the issuer of NCD is called Coupon. Companies which carry higher risk give higher interest rate than others to lure investors for investment. There can be various options for interest payout such as monthly, quarterly, half yearly or annually. However, most NCDs offer annual and cumulative payout.
- Credibility of the Issuer / Promoter – Before investing in NCDs, it is advisable to look at company’s financial health and end of use funds. Analyze the reason for raising the money from the markets. Check rating of companies which gives an idea of safety of your investment.
- Additional Features – Some NCD public issues offer special rate of interest to Senior citizens or to shareholder. So, you may buy some shares and then invest in the NCD issue to get special interest rate. You have to provide your shareholding details in the application form.
Non-Convertible Debentures Vs Fixed Deposits
- Secured NCD are backed by assets that depositors can claim if the company fails to repay. Bank and Company FDs are unsecured. Bank FDs are guaranteed to the extent of Rs 1 Lakh only.
- NCDs are tradable on Stock exchanges. FDs are not tradable.
- Credit Rating is mandatory for NCD public issue. Credit rating is mandatory only for Company FDs (offered by NBFCs)
- Interest earned on both the investments is taxable as per the investor’s income tax slab rate.
NCDs Vs Tax free bonds
- Generally, the size of Tax Free Bond issues is big and they can score above the NCD on Liquidity parameter.
- The credit ratings associated with Tax-free bonds can be better than NCDs, so the interest rates offered on Tax free bonds can be lower than that of NCDs.
- Interest earned on Tax free bonds is exempted from income tax. However, the interest earned on NCDs is chargeable to tax.
Debentures & Taxation
- TDS is not applicable on the listed debentures’ interest payouts (which are in Demat form). Else, TDS will be applicable if the interest exceeds the threshold limit of Rs.5,000/- in a financial year.
- Interest earned on NCD bonds is taxable as per the tax slab of the investor.
- If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.
- If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 20% with indexation & 10% without indexation is applicable.
My opinion
Bank Fixed Deposits may offer 8 to 9% returns, so it is natural to get enticed looking at 11% returns offered by the NCDs. But, we need to calculate post tax returns on debentures, as the interest payouts are taxable.
Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }
Tax adjusted returns on NCDs can make them not so attractive. If you are in the income-tax bracket of 20% and more, invest in tax-free bonds. If you belong to low income-tax brackets, you can surely consider investing in highly rated (like AAA, AA, AA+ etc.,) NCD public issues. Tax free bonds are good for high tax bracket individuals, whereas debentures can be best suited for low tax bracket individuals.
(Do note that credit rating can change after the NCDs get listed on stock exchanges. So, you may have to keep track of the ratings.)
Read : ‘Latest & Upcoming NCD Public Issue 2016 to 2017 – Details‘.
Investing in Bonds/NCDs helps to diversify one’s debt investment but make sure that it is only a small portion of your Fixed income portfolio.
(Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net)
Hi Sreekanth Reddy, Thanks for the informative article. Can you please share your views on the below queries:
1. Is there any Accrued Interest concept for Cumulative NCD If I plan to hold my Cumulative NCD till maturity (5 years)? If Yes!
2. Do I need to show my Accrued Interest every year while Filing my Tax, and compute the tax for the same as income from other sources?
Dear Prakash,
Below are tax implications relate to NCDs;
TDS is not applicable on the listed debentures’ interest payouts (which are in Demat form). Else, TDS will be applicable if the interest exceeds the threshold limit of Rs.5,000/- in a financial year.
Interest earned on NCD bonds is taxable as per the tax slab of the investor.
If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.
If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 10% without indexation is applicable.
If TDS is applicable in your case, advisable to disclose the interest from NCDs as ‘income from other sources’ in your ITR (yoy) and file taxes accordingly.
Dear Sreekanth,
Thank you for clarifying my query.
My NCD is in the Demat form, hence TDS is not applicable. However, I’ve opted for the cumulative option, hence my total interest will be credited only on maturity.
Can you please let know if Do I need to show my Accrued Interest every year while Filing my Tax (though TDS is not applicable in my case), and compute the tax for the same as income from other sources?
Dear Prakash,
If you are following the cash method of accounting, interest will be taxable as and when the interest is received. Under the mercantile method of accounting, interest income on NCD will be taxable as and when interest is accrued and due.
I believe, you need not declare the accrued interest in your tax return for the years before maturity. It can be simply added to your income under the head Income from Other Sources and taxed as per the applicable income tax slab rate, on maturity.
Dear Prakash,
I have missed one point here;
From FY 2023-24, Interest income on listed NCDs or NCDs held in demat form are also subject to TDS (over and above Rs 5,000), at 10% rate.
I plan to buy an NCDs in secondary market. It pays monthly interest. If interest is due on 1 February and my purchase happens on 27 Jan, will I get full month interest?
Dear Karan,
“Monthly interest’ , it depends on type of payment of a particular NCD Issue. There can be a Series where ‘accumulation’ option only will be there and the interest gets paid on maturity date.
It depends on if you get the allotment..
Your write up is very informative.I want to purchase NCD from secondary market .Edelweiss NCD available at Rs 900 having face value of 1000.what will be the maturity date of NCD purchase from Market and at the time of maturity will the face value be considered Rs 1000.pls explain in detail
Dear MAYANK .. Maturity Date can be available in the Series name itself..kindly check (or you can check with your Service provider as well).. Yes, the face value will remain at Rs 1,000.
Hi Sreekanth,
Hope you are doing well.
I just read my first article on this site on NCDs and I find it very informative. Thank you for sharing your expertise through this platform. I am thinking to invest / evaluating one of the Secured NCD recently issued. Need your advice / suggestion.
Regards,
Dhruv
Dear Dhruv,
Welcome to ReLakhs 🙂
Yes, may I know your query??
i am having non convertible debenture of DHFC which is having problem and company stopped of paying interest . i have purchased from company before one year back. whenever i get amount will company pay me for full amount or as per rate prevailed in market ?and how long company take to repay my amount ?
Dear Ashok,
Did you sign the Draft Resolution document that you might have received from the Trustee?
Dear sir. Now LT Finance and Magma Fincorp has come up with NCD. Can we invest in that.your advice is highly valued. I like reading ur articles. Please siggest
Dear Senthil,
You may kindly go through my review on L&T Fin (April 20190 NCD Issue..
Nice article!!
1. Will the coupon rate remain the same when I buy from the open market (later) or if I buy during the issue ?
2. Will I have a similar lock-in period (for LTCG) if I buy from open market ?
Dear Nahuah,
1 – The coupon rate remains the same but the purchase price may not be the same as Issue Face value.
2 – If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.
If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 20% with indexation & 10% without indexation is applicable.
If you hold on to the bonds till maturity then only Interest income is taxable.
Great article !! Is the coupon rate the same if I buy from the open market (later) or if I buy during the issue ?
Hi Reddy.
I am going to invest in NCD latest issued. Please confirm mode of money transfer after maturity? Is there any need to fill Physical form or It get automatically transferred to linked Demat account.
Thanks,
Gaurav
Dear Gaurav,
Yes, mostly direct credit will happen.
Thank You Reddy for your kind revert.
Dear Sreekanth,
Thanks for your support. I have invested in NCD Rs 200000 for 3 years (face value 1000), Do this face value goes down or is there any possibility of loosing money from NCD.
Dear Jacob,
NCDs, if held till maturity date, the debenture holder gets the principal invested, along with the interest accrued.
NCDs in secondary market can have last traded price which is below their Face value. If you sell the NCDs before maturity date in secondary market, you may make either Capital gains / loses depending on the sale price.
Thanks Sreekanth, How can we know the current face value of my NCD ( Demat Bank HDFC and NCD – Kosamattom, Also if we wish to sell out before maturity do we get buyers for NCD??.
Dear Jacob,
Finding a buyer can sometimes be a tough task in secondary market.
You can track the prices at moneycontrol.com
NSE-Data.
BSE – Data.
Hi Sree, i had the muthoot 3 years cumulative option ncd worth 10k. This issue has been matured and i got back around 15k. How the taxation will happen on this? Will additional 5k will be treated as interest income and get added in my other income and taxed as per my slab or the whole amount will be considered as LTCG and taxed accordingly?
Dear Deepak,
Interest earned NCD bonds is taxable as per the tax slab of the investor under the head ‘income from other sources’.
Hi Sreekant, My parents want to invest 10 lakhs in such a way that they can get higher returns within short period of time with no risks. Please advise to which TAX FREE BONDS/NDC or FD will be appropriate for them as they are sernior citizen.
Dear ANSHUMAN ..Kindly understand that higher returns with no risks and that too in short-period of time, sounds un-realistic, isn’t it?
May I know if they are dependent on the income generated by this corpus? Are they looking for fixed/periodic income?
Read: List of investment options!
Thanks for detailed post as always 🙂
Query: Grandfather wants to invest 50k into DHFL NCDs in the name of grandchild for 7 years. Is this a that kind of investment option in debt market? Could you please suggest better option for these kind of investment? (Tracking of the investment won’t be regular)
Thanks.
Dear Vinay,
If the investment objective is ‘wealth generation’, is n’t it wiser to invest in equity oriented mutual fund schemes like a Balanced fund ??
Hello air shriram transport finance are issue secure NCD for 3 ,5,7 year if you are intrested so you call me 7060134845…..till date is16 oct
Hey, Sreekanth I had a fundamental question. Even f we buy secured NCDs, whose job is it to actually takeover the securitized assets and then pay back the bond holders. As a retail investor, I cannot do much right? Then who assures that the assets will be taken over and resold in case the company defaults and the proceedings from the sale will be distributed back to the investors!
Dear Utsav..The investors can approach Court of law as in the case of Deccan chronicle. That is why NCDs are riskier than say Bank FDs and hence they offer higher rate of interest.
a debenture trustee is appointed by the debentureholders(both, secured with charge or not) and he will inform if any breach of the terms of issue or covenants of the trust deed has taken place.also he takes care of the insurable interest of the holder. also, in case of winding up Liquidator does it for company and prepares liquidator statement of accounts.
Informative. I have invested in DHFL Bonds; and received a partial refund of the amount. By when will the allottment show up in the demat portal through which I have invested?
Thanks,
Sunil.
Dear Sunil,
DHFL Bonds Alltoment Date is 16 Aug 2016. So, kindly wait and check again. Else contact your demat service provider.
Sir, its a very Good Article.
Thanks for explaining it in so nice way.
The details on NCDs are very crisp and clear . But i am unable to differentiate the benefit between NCD and FDs as both are taxable only?
Dear Kavita,
In both the cases, interest income is taxable. So, one needs to consider after-tax return of both the instruments and then decide.
Returns are fixed but returns from bank FDs are guaranteed while in case of NCDs, there is a chance of default if the business environment of the issuing company worsens. If you decide to invest in NCDs, you may opt for SECURED NCDs.
Hello Srikanth.
Thanks for your valuable info about NCD’s. Currently there is DHFL NCD opened today and it is mentioned that allotment will be based on First Come First Serve basis. I can already see the issue is oversubscribed by 18 times and almost all categories expect retail less than 10 Lakhs is over subscribed. How people is still betting as the allotment is already oversubscribed ? Also is NCD’s are listed in market?
Dear Raj ..Just a hope to get some allotment in case if there are any cancellations 🙂
These NCDs will get listed on both the national exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. The investors can sell these bonds on the exchanges.
der sir
i want to kn ow
if i invest 5 lakh in ncd now then how much can i get return after 5 to 6 years (approxmetily)????
and per annum i get fixed interest?
where can i see live pirce of ncd (like equity )
Dear Lal,
The returns are dependent on the Rate of interest.
Generally there will be two options; cumulative (where interest + principal is paid on maturity date) & non-cumulative (where interest paid periodically and principal repaid on maturity date).
Click here to check bond prices..
Hi,
I would like to invest 50 lakhs,i am 39 years.give me secured options to invest.
Thanks,
Baiju.
Dear Baiju..Kindly read this article: List of best Investment Options!
There is a clear demarcation between taxation of listed and unlisted NCDs,I guess listed NCD are taxed @10%,without indexation,Pls elaborate
Dear Anil,
Listed Debentures : Holding period 1 year to qualify as LTCG. STCG tax rate @ of 10% without indexation & LTCG tax rate is as per ‘income tax slab rate’.
Unlisted Debentures: Holding period of 3 year to qualify as LTCG. STCG is taxed @ of 20% without indexation & LTCG is per ‘IT slab rate’.
Dear sree,
Planning to invest in NCD need your expert advice to choose best NCD with higher ROI. Awaiting your reply. Thanks
Dear Sreekanth,
Regarding NCD, provided informations all are highly worthy for investors. Thanking you and appreciating your above support. Could you please explain the term “high tax bracket individuals and low tax bracket individuals” at your end as I am working abroad (NRE A/C holder)
Thanks,
Manu
Dear Manu,
High tax bracket – who are in 30% tax slab rate
Low tax bracket – who are in 10% slab rate.
Kindly read : Income Tax Slabs & Rates FY 2016-17.
Thanks for your valid response…..
very good article on NCD. How is the financial Health of Sri Ram Transport, Muthoot Finance, Mannipuram Finance,
IFCI and others. Give their Post Tax Profits
2. Any defaulters in interest and repayment in NCDs
3. future Issues of NCD for 2016-17
Dear adolf,
I do not track these companies’ balance sheets.
Suggest you to stick to SECURED NCDs.
Thanks for explaining so clearly for the guys new to market terms,
hi
i am interested in investing upto 50 lakhs towards my retirement plan. pls suggest the best plan
Dear asokan,
Let me know your age and expected retirement age.
Kindly read: Retirement planning goal & calculator..
Hi Sreekanth, I just noticed your articles today. I would like to get your suggestions to invest 30 lakhs. My children are studying in 4th and 7th std. I need to use this fund for their future. How/ where should I invest? Is FD is the best? Pls suggest
Dear Deepu,
Before working on investment plan, let’s analyze your insurance requirements.
Do you have adequate life cover/health cover? Kindly share details about your existing life insurance policies (if any).
Read:
Financial planning pyramid.
Retirement planning calculator.
Kid’s education goal calculator.
Hi
one of my investment is about to mature to an amount of Rs 5 lakhs this month. Would need your advice to do a better investment keeping in mind a longer term reliable return.please advse options.
Thanks
Dear Harish,
Kindly let me know about your financial goals??
Do you hold any mutual fund schemes?
Sree,
As of now I only Franklin Templeton Taxshield for 30K to cover the tax for this year. I’m interested to invest in MF, but I’m told that to start with small SIP rather than big investment to start with. Please advise.
Thanks
Dear Harish,
It is not small or big, what is important is ‘to identify your financial goals’ first. Start SIPs at the earliest. Invest whatever you can afford to do.
Kindly read my articles;
How to create a solid investment plan?
Top 15 equity fund SIPs
Top balanced funds
Dear Mr. Sreekanth,
Your article is very informative and crisp giving a very good insight on all the relevant aspects.
I am looking for an opportunity to get associated with you
Thanking you and regards
Vijayan N G aiyar
+91 78290009**
Thank you dear Vijayan. In what way can we associate? Kindly provide further details. You can email me to sreekanth [at] relakhs.com .
Dear Sreekanth,
Very good article with great information. Thanks for explaining about it. I’ve read about NCD before on my interest in many websites which gave little perception, but here i find the whole picture on a single page. Hats off!.
Thank you Bala 🙂