Non-convertible Debentures are debt instruments that are issued by companies to raise long-term capital. NCDs work at a fixed rate and have a fixed tenure of time.
Non-convertible Debentures can not be converted to equity by the issuing companies, and these are traditional debentures. Compared to Convertible debentures, Non-convertible debentures investors get higher interest rates, to compensate for the lack of convertibility.
NCDs Benefits
NCDs offer many benefits, along with that, high liquidity through stock market listing. Tax exemptions at source and also safety as they can be issued by good credit rating companies, are RBI specified norms for NCD issuance in India. Normally, these NCDs have a maturity of minimum 90 days.
Taxation
NCDs carry tax implications according to an individual’s tax bracket. If NCDs are sold within a year, STCG is applied and taxed at the tax slab rate. LTCG will be applicable if an NCD is sold after 1 year and before the maturity date ( LTCG of 20% indexation is charged ). Interest income is taxed similarly to fixed income securities under income from other sources.
Credit Rating
All companies are ranked by credit rating agencies, such as CRISIL, CARE etc. Determining a company’s potential, it plays a major role. A higher Rating companies means this company has a capability of fulfilling credit obligations. However, a low credit rating means the company has higher credit risk. The Rating agencies give lower ratings to those companies, which issuing companies are unable to make payments.
Interest
NCDs offer a higher interest rate of 7% to 9%, if held till maturity. Here interest payouts are either monthly / quarterly / half-yearly or annually. NCDs do have cumulative payout options. Moreover, unsecured NCDs hold a higher interest rate.
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Jyoti Prakash Nayak, B.Sc MBA BA CFP
CERTIFIED FINANCIAL PLANNER & FINANCIAL WRITER
