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”.