Non-Convertiable Debentures

In the time market volatility, one of the best ways of earning fixed return on investment is to invest in Non-Convertible Debentures.

Company raises money from public by issuing debt paper for a specified tenure where it pays a fixed interest on the investment. This paper is known as a debenture.

Types of Debentures:

(i) Convertible Debentures:

Convertible Debentures are those which gets converted into equity share on maturity.

(ii) Non-Convertible Debentures:

Non – Convertible debenture do not have the option of conversion into shares on maturity. The holders of such NCDs get principal amount along with accumulated interest on maturity.

Security of NCDs:

Secured NCD is backed by the assets of the company and if it fails to pay the obligation, the investor holding the debenture can claim it through liquidation of these assets.

There is no backing in unsecured NCDs if company defaults.

Company seeking to raise money through NCD has to get its issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. A higher rating (e.g. CRISIL AAA or AA-Stable) means the issuer has the ability to service its debt on time and carries lower default risk. A lower rating signifies a higher credit risk.

Interest Rate on NCDs:

Interest rates on NCDs are generally higher than interest on savings bank account or interest on fixed deposit. Generally, interest rate on AAA rated paper ranges between 9.50% to 10.00%.

The interest on such NCDs can be paid either quarterly, half yearly or annually. Companies having lower credit rating offers higher rate of return on NCDs.

Frequently Asked Questions:

1.Are NCDs listed on exchange?

It’s not necessary that NCDs are listed on exchange. It depends on issuer whether to get it listed on exchange or not. If the NCDs are listed on exchange then they can be sold on the exchange and the gain or loss on selling depends on the interest rate prevailing in the market at the time of sale.

2.How the gain on sale of NCDs taxed under Income Tax Act?

If the NCDs are listed on exchange, then gain or loss on sale of such NCDs is treated as short term or long-term capital gain. Short term or Long-term Capital gain depends on the period of holding of such debentures.

If the NCDs are not listed on exchange then total additional amount received on maturity and during the holding period of the NCDs will be treated as interest income and taxed under the head “Income from Other Sources”.

Fixed Deposit

What are Fixed Deposits (FDs)?

By investing in form of deposits in banks or companies, investors can earn a fixed return quoted

on such deposits by the banks or companies. These types of investments are Fixed Deposits.

Fixed Deposit is one of the safest forms of investment carrying zero risk.

Types of FDs:

(i) Bank Fixed Deposits:

The tenure on Fixed Deposits in banks ranges from 7 days to 5 years. Interest on these fixed deposits depends on tenure.

(ii) Corporate Fixed Deposits:

Deposits under Corporate FDs are governed by Section 58A of Companies Act.

Who can invest in FDs?

  • Every resident Indian or NRI
  • Trusts
  • Charitable Institutions
  • Schools
  • Partnership firms/LLP
  • Companies
  • HUFs

Withdrawal of funds invested in FDs:

On Maturity:

The investor will get the whole amount as committed by the banks or companies on the maturity of FDs. The interest paid on such FDs is generally compounded rate of interest.

Pre-Mature Withdrawal:

If the funds are withdrawn before the maturity of the instrument then the investor will get somewhat lesser amount instead of the promised amount by those financial institutions.

Features of FDs:

  • Tenure of investment in FDs starts from minimum 7 days upto 10 years
  • Rate of interest on FDs depends on financial institutions and the tenure for which the amount is invested
  • Senior citizens get slightly higher rate of interest on FDs
  • Interest on FDs is generally compounded

Frequently Asked Questions:

1.On what basis Corporate FDs be selected for investment?

The investor should see the credit ratings given by various credit rating agencies like CARE, ICRA, Moody’s etc. the companies having rating A and above are considered to be less risky.

2.What is the interest rate offered on Corporate FDs?

Corporate FDs generally yield higher returns than banks. Corporate FDs are unsecured and are generally for shorter duration.