Apprehension and a low of risk appetite often dissuades most people from investing in the stock markets. Investing in equities may often require the investor to build tenacity for risk – but there exist several other instruments which enable an investor to maximize on returns while minimizing on the risk. One such instrument is – Non Convertible Debenture.

This week, we tackle all the basic questions surrounding NCDs and why should you consider investing in them.

• What are NCDs?

Non-convertible debentures (NCDs) are debt instruments with a fixed tenure issued by companies to raise money for business purposes. Unlike convertible debentures, NCDs can't be converted into equity shares of the issuing company at a future date. Some of their features are as mentioned below:

• What's the difference between NCDs & FDs?

• Hence, is investing in NCDs better than parking funds in corporate/bank FDs?

• NCDs vs. Corporate fixed deposits:

Yes, of course NCDs are better than company FDs as can be seen from the above table.

Though usually the interest rates on NCDs and company FDs are more or less the same, what tilts the balance in favor of NCDs is the risk-return factor. Furthermore, there is also potential to earn capital appreciation from NCDs if there is a downward movement in the interest rates.

• NCDs vs. Bank fixed deposits:

Again, NCD is better than a bank FD because the interest differential is quite significant which comes at just a slightly higher risk. In other words, risk-return ratio is in favour of NCDs.

• Let’s get to the tricky part - How the returns from NCDs are taxed?

Returns on non convertible debentures are taxed as income. There is no tax deduction at source (TDS) if you invest through the DEMAT mode. Hence, the tax implications on an NCD occur in the following manner:

• Interest income from NCDs will be subjected to tax at normal rates by including it in 'Income from other sources'.
  
  
• While the Capital Gains will be taxed in the following manner: