Invest in NCDs for Higher Fixed Returns and Lower Tax Burden

NCDs refer to Non convertible debentures. They are considered one of the best debt options for the purpose of investments. There are two types of debentures –

Secured debentures- Secured debentures are backed by assets of the company wherein there is a ‘charge’ on the asset. Hence, in case of a default, the asset can be sold to pay off the return.

Unsecured debentures - Unsecured debentures do not have any such backing by assets. They are purely backed by the reputation and creditworthiness of the company issuing them. In case of a default there is nothing that can be done.

However, secured debentures offer lower interest rates than unsecured debentures.

There are various options available in case of an NCD. If you wish to have a regular flow of income over a short span of time, you can choose an NCD which gives regular interest payouts, but if you wish to have regular income over a longer period, you can opt for an NCD which gives cumulative interest payouts.

NCD assure higher returns and lower tax burdens as compared to other investments instruments.

Returns: Let’s take an example to understand how NCDs give higher returns:

  • Case in point: Tata Capital NCDs which were issued in February 2009
  • Price quoted: Rs 1,172
  • Face value: Rs 1,000
  • Rate of interest - 11-12%.

  • L&T Finance NCD - 9.5-10.24%.

Hence the interest payout will be an appreciated 17% over 18 months.

Thus, NCDs can make you earn interest as well as capital appreciation. If the rate of interest in case of a long term maturity reduces,  you can still enjoy the gains from interest. Also, if you would like to play safe, you can  enjoy the gains by holding the NCD till maturity.

Taxation: The income from an FD, that is the interest earned on an FD, is treated as income from other sources and is taxed like any other income. But as the case of an NCD, income is taxed like the interest on a company FD. If the NCD is  listed on a stock exchange, and  is listed for at least 1 year before the sale takes place, the capital appreciation is treated as a long term gain. Short term gains are taxed like any other income and long term gains are taxed at a fixed rate of 10.3% without indexation. Also, income from NCDs listed on an exchange is not subject to tax deduction at source (TDS).

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