If you have been regular to personal finance blogs or financial newspapers you would often hear about NCDs or Non-convertible Debentures. This post explains the following concepts about NCDs:
Non-convertible Debentures (NCDs) are similar to Fixed Deposits (FD) but they are issued by companies to raise funds from investors for their business. They are called Non-convertible as they cannot be converted to shares of the issuing company on a future time as in case of Convertible Debentures. They are also popularly known as Bonds or Debentures.
Similar to FDs, the companies pay a fixed interest for the entire tenure of investment. This interest rate is known as coupon rate for NCDs.
Based on whether the fund raised by the company is backed by asset or not, it’s classified as Secured vs. Unsecured NCD.
Based on payment frequency of interest on NCD, it can be classified as Cumulative Payout or Regular Payout.
NCDs can be offered with maturity period ranging from 1 Year to 20 Years. But there could be two options here:
Companies regularly come out with NCD offers throughout the year. These NCDs are offered by financial institutions, banks, and brokers etc to retail investors.
In case you have Demat Account, it’s easiest to apply through that. There is no paper work and everything can be done online.
In case your Demat account is not offering the NCD, you can apply through filling up physical forms available with sellers of the NCDs. There you can mention your Demat Account Number and the NCDs would be allotted to your Demat Account.
You can also buy and hold the NCDs in physical form.
As stated above you can be allotted NCD both in Physical Form and Demat Form. If you have Demat account it’s always advisable to get NCD in Demat form. Demat form of Holding have the following advantages over Physical Certificates:
Most of the NCDs are listed on at least one Stock exchange (NSE/BSE). But unfortunately for most of NCDs the liquidity is low on Exchange and hence it’s difficult to buy/sell at fair price. If you need to exit urgently, be prepared to sell at a discount. That’s why it’s recommended to invest in NCDs with view to hold it till maturity.
For Tax Purpose NCDs are treated as Debt Investment (similar to FD). The interest earned is added to your income as “income from other sources” and taxed accordingly.
In case the NCD is sold before maturity on stock exchanges, it would lead to Capital Gains and taxed according to the holding period.
There is no TDS (Tax deduction at Source) deduction for NCD held in Demat form, while in case of NCD held in Physical Form, TDS would be deducted if the annual interest payout is more than Rs 5,000.
NCDs are good investments and should have a place in your Debt Portfolio. If carefully chosen they offer higher returns than Bank Fixed Deposits.
However there are few things you should keep in mind:
Please share your thoughts in case I missed something or you have any questions!
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I had bought L & T Finance 10.24 % NCDs from market more than 3 years back at an average price of Rs 1042.(face value Rs.1000) These NCDs were redeemed on 17th Sept 2019 & I recd Rs 1000 per NCD. This meant I had long term capital loss of Rs 42 per NCD.
Will it be correct to claim benefit of Capital loss @ 10 % on above ?
Please clarify.
I want to buy ncd from the market then how they calculate interest and how i know its maturity?
I want to know tax slab
A Customer having NCD in both physical & Demat and the income earned from both is 500000. Whether customer has to submit 15H
There is no TDS for NCD in demat form so no Form 15H is required. For the units held in physical form, you can submit Form 15H to the respective company to avoid TDS
If i remain invested till maturity which is more than 12 months then the tax will be calculated as long term capital gain 20% with indexation benefit. My question is this long term capital gain is applicable even for maturity withdrawal or only for pre-withdrawal?
Capital gains arise only when the NCD is sold on stock exchange. In case you hold it till maturity it's interest income and taxed as per tax slabs applicable to you.
Is the doubling bond (NCD) is taxable on maturity?
Yes NCD is taxable on maturity :)
Is the exemption in TDS is available in NCD annuel interest with Form No.15 with 2.5lac limit?
Form 15G/H is only for Bank/Companies FDs. You can subscribe to NCDs via Demat Account and there would be no TDS in the same