Bonds/Non-Convertible Debentures (NCDs)

Understanding Bonds and Non-Convertible Debentures (NCDs)

Bonds are fixed-income instruments issued by governments or companies to raise capital, paying periodic interest and returning principal at maturity. Non-Convertible Debentures (NCDs) are a type of bond issued by companies that cannot be converted into equity shares. NCDs offer higher interest rates than traditional bonds due to higher credit risk. Both bonds and NCDs can be secured or unsecured, affecting their safety. Investors earn through interest income and possibly price appreciation if traded before maturity.

What are Bonds?

A bond is a fixed-income investment where you lend money to a government, company, or institution. In return, the issuer pays you regular interest (coupon) and repays the principal on maturity.

Why invest in bonds?

• Provide stable and predictable income
• Lower risk compared to equities
• Help diversify your portfolio
• Suitable for capital protection and steady returns

What types of bonds exist?

• Government Bonds (G-Secs): Very safe, backed by the government
• Corporate Bonds: Issued by companies, higher returns but higher risk
• Tax-Free Bonds: Interest earned is tax-free
• Convertible Bonds: Can be converted into company shares

Taxation on Bonds

1. Interest Income:

• Interest earned on bonds (Government, Corporate, Taxable Bonds) is taxable as “Income from Other Sources”.
• It is added to your total income and taxed as per your income tax slab.
• Exception: Interest on Tax-Free Bonds (like NHAI, REC) is completely exempt from tax.

2. Capital Gains (on Sale of Bonds):

• Held < 12 months (listed bonds) → Short-Term Capital Gain (STCG), taxed as per your slab.
• Held ≥ 12 months (listed bonds) → Long-Term Capital Gain (LTCG). Prior to July 23, 2024, LTCG for listed bonds (held ≥12 months) was taxed at 10% without indexation. However, from the 2024 Budget onward, this was updated to a flat 12.5% rate.
• Unlisted bonds → STCG if held < 36 months (slab rate), LTCG if ≥ 36 months (20% with indexation).

What are NCDs (Non-Convertible Debentures)?

What is an NCD?

A Non-Convertible Debenture (NCD) is a type of corporate bond. When you invest in NCDs, you are lending money to a company for a fixed period. In return, the company pays you a fixed rate of interest and returns your principal at maturity.

Why are they called "Non-Convertible"?

Unlike convertible debentures NCDs cannot be converted into company shares. They always remain as debt instruments. This is why they are called Non-Convertible.

Why invest in NCDs?

• Offer higher interest rates than bank fixed deposits
• Provide fixed and predictable returns
• Can be secured (backed by company assets) or unsecured
• Tradable on stock exchanges, giving liquidity before maturity

What should investors keep in mind?

• Returns depend on the company’s credit rating and financial strength
• Higher returns usually mean higher risk
• Interest earned is taxable as per your income slab

Taxation on NCDs (Non-Convertible Debentures)

1. Interest Income:

• Interest earned is fully taxable under “Income from Other Sources.”
• Taxed as per your income tax slab.
• Usually, TDS is deducted if NCDs are held in demat form and issued by a company.

2. Capital Gains (on Sale of NCDs):

• If sold on stock exchange before maturity:
  • Held < 12 months (listed NCDs) → STCG, taxed as per slab.
  • Held ≥ 12 months (listed NCDs) → LTCG. Prior to the 2024 Budget, LTCG on listed NCDs was taxed at 10% (without indexation). After July 2024, the rate has been increased to 12.5% flat for most long-term capital assets including listed NCDs. This flat tax applies regardless of your income tax slab.
• For unlisted NCDs:
  • STCG if held < 36 months (slab rate).
  • LTCG if ≥ 36 months (20% with indexation).

Explanation:

• For unlisted NCDs, the LTCG threshold is 36 months.
• Once you hold them > 36 months, gains are classified as long-term.
• You are taxed at 20%, but indexation benefit is allowed—meaning your cost of acquisition is adjusted for inflation (which can reduce tax liability).

In short: NCDs are fixed-income instruments issued by companies, ideal for investors looking for higher returns with known risk.

Quick Difference:

• Bonds may include tax-free options (special govt bonds).
• NCDs are always taxable; no tax-free category exists.