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Published on:

February 19, 2025

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NCD Taxation Rules in India: A Quick Overview

NCDs are fixed-income investments in the debt category. Unlike convertible debentures, they cannot be turned into company shares or equity. Instead, they offer fixed returns through interest payments, repaid in full upon maturity.

Key Features of NCDs:

1. Fixed Interest – Earn a guaranteed return.‍

2. Set Maturity Period – The company repays your money after a fixed time.‍

3. Flexible Interest Payouts – Choose to get interest monthly, quarterly, annually, or at maturity.‍

4. Tradable in Stock Market – You can buy or sell NCDs before maturity.

How do they work?

1. Speculators win intrigued either at normal intervals (month to month, quarterly, or yearly) or as a protuberance entirety at development.

2. Since they are not connected to stocks, NCDs give steady returns with lower hazards.

Types of Non-Convertible Debentures (NCD)-

Secured NCD

1. Backed by company assets, making them safer.

2. If the company defaults, investors can recover their money by selling these assets.

3. Offer lower interest rates since they carry less risk.

Unsecured NCD

1. Not backed by any company assets, making them riskier.

2. If the company fails to pay, investors must wait without any security.

3. Offer higher interest rates to compensate for the risk.

Tips for Investing in NCD

1. Check the purpose – Avoid investing if the company doesn’t clearly state how funds will be used.‍

2. Diversify investments – Invest in different companies and periods to reduce risk.‍

3. Avoid sector concentration – Don't put all money into one sector (e.g., NBFCs focused on personal loans).‍

4. Look for secondary market opportunities – Older NCDs often give better returns when new ones are issued.‍

5. Don’t focus only on interest rates – Check the actual yield, as it determines real returns.‍

6. Sell at the right time – The best time to sell is when interest is due, as demand is highest.

By following these tips, you can maximize returns while managing risks effectively.

Taxation on NCDs

Tax on Interest Income

Interest from NCDs is taxed as per your income tax slab.

TDS on NCDs

1. 10% TDS is deducted if interest exceeds Rs.5,000 (20% without PAN).

2. No TDS on NCDs held in Demat form.

3. You can claim a TDS refund if your total income is non-taxable.

“To learn more about TDS deduction on interest, you can read this detailed guide here.”

Tax on Selling NCDs (Capital Gains tax)

1. Sold within 12 months a Tax per your slab (Short-Term Capital Gains): If you sell a valuable thing like stocks, or property within a year of buying it, that is known as Short-Term Capital Gain (STCG). The tax on this depends on your income slab meaning it gets added to your total income and is taxed in the same way. So, if you fall under the 30% tax bracket, the gain will also be taxed at 30% plus any cess or extra charge. However, for stocks and equity, the tax rate is a flat 15% if a Securities Transaction (STT) applies.

2. Sold after 12 months with a 20% tax with indexation benefit (Long-Term Capital Gains): When you hold a valuable thing for more than a year before selling, it is termed a Long-Term Capital Gain (LTCG). The tax rate is 20% but yet get an indexation benefit which means the purchase price for inflation, reducing your taxable gains. However, for stocks & equity, LTCG over 1 lakh rupees is taxed at 10% with indexation.

"Want to understand Capital Gain Tax? Check out this blog here.”‍

Top Features of Non-Convertible Debentures-

Fixed Interest Rate

1. NCDs offer a fixed interest rate (usually 7% to 9%).

2. Unsecured NCDs generally have a higher interest rate than secured ones.

Taxation on Sale

1. No tax when buying NCDs, but selling them attracts tax:

a. Sold within 1 year → Taxed as per your income tax slab (Short-Term Capital Gains).

b. Sold after 1 year → 20% tax with indexation (Long-Term Capital Gains).

Credit Rating Matters

1. A company’s credit rating determines the security of NCDs.

2. Higher rating = Lower risk of default.

Capital Adequacy Ratio

1. This ratio measures a company's ability to repay debts.

2. Higher ratio = Safer NCD investment.

Benefits of Investing in NCDs

Fixed Returns

1. NCDs provide a steady income, usually higher than bank deposits.

2. You can choose to receive interest monthly, quarterly, annually, or at maturity.

Low Risk (If Chosen Wisely)

Secured NCDs from top-rated companies have a low risk of default.

Easy to Buy & Sell (High Liquidity)

1. NCDs can be bought or sold in the stock market like shares.

2. You can also use options contracts to manage risks.

No Tax When Buying

1. No tax on purchase (as per Section 193 of the Income Tax Act, 1961).

2. The tax applies only on the interest earned or when selling.

NCDs are a good choice for fixed-income people or businesses who are looking for higher returns with risk.

Corporate fixed deposits (FDs) VS Non- Convertible Debentures (NCDs)-

Features	Corporate FDs	NCDs
Safety	Risky (Bank FDs insured up to Rs.1 lakh)	Secured or unsecured, backed by company assets
Premature Withdrawal	Possible with a penalty (not for all FDs)	It is not allowed, but can be sold on the stock market
Tax	TDS applies if interest exceeds Rs.10,000	Tax on interest earned; No TDS on Demat NCDs
Insurance	Insured up to Rs.1 lakh (DICGC)	Not insured but secured against company assets
Liquidity	Cannot sell in the market, but easier to withdraw	Can trade on stock exchanges, but no early withdrawal
Interest Risk	Fixed-rate, no risk	May fluctuate with market conditions

Conclusion

NCDs offer a great balance of fixed returns and market liquidity, making them ideal for investors seeking higher yields than FDs. While secured NCDs provide safety, choosing the right issuer and timing your investments wisely is key. If you want a steady income with manageable risk, NCDs can be a smart addition to your portfolio!