NCDs are Fixed Income Instruments for
Assured Returns Non Convertible Debentures (NCDs) or Bonds are debt investments in
which you lend money to a corporate or government entity that borrows the
funds, for a specified period of time at a fixed interest rate.
NCDs are suitable for
·
Stable consistent return with least risk
·
Consistent
periodic return rather than lump sum return
·
Low
risk appetite
· Diversification of portfolio with debt instrument
NCDs Benefits
·
Return
is relatively higher in NCDs than a lot of other investment avenues.
·
No income tax is deductible at source as per the provisions
of Sec 193 of the IT Act.
·
NCDs
are listed and traded on the exchange, hence providing liquidity to the
investor.
·
Agencies
like CARE, FITCH, CRISIL, ICRA rate NCD's that are good indicator of quality of
debt paper.
· As NCDs are only in Demat online form, it is easier to handle and track.
Difference between NCD
and Bond
NCDs are issued by public companies, whereas bonds are issued by government entities, large companies, and financial institutions to raise capital for the business purpose. Bonds are generally secured, whereas NCDs can be secured and unsecured.
What are Convertible
and Non Convertible Debentures
Convertible debentures are those type of debentures that can be converted into equity shares of
the company. Non-convertible debentures are those debentures that cannot be converted into equity shares
of the company.
Type of NCDs
Secured NCDs: Secured NCDs are considered
safer of the two kinds as their issues are backed by the assets of the company.
In the event of the company failing to pay on time, then the investors can
recover their dues by liquidating the company’s assets. However, the interest
offered on NCDs is low.
Unsecured
NCDs: Unsecured NCDs are much riskier than the secured NCDs as the
assets of the company do not back these. Hence, when the company defaults on
its payment, the investors have no choice but to wait until they receive
payments as there are no assets of the company to recover their dues. However,
the interest rate offered on unsecured NCDs is higher than that of secured
NCDs.
Is NCDs interest Taxable
In short term (Less
than 1 year) NCDs are taxed at your slab rate, which means if you are in
the highest tax bracket, the interest you earn will be taxed at 30%.
In long term capital gain tax is 10%. NCDs can work for those in the lower tax category or those
with no taxable income.
Don’t let high interest rates sway
you, look at the risks