Non-convertible
debentures or NCD are company fixed deposits, basically it is like you are
giving a loan to the company, in return the borrowing company pays you interest
on the capital.
Even though NCD’s are like fixed deposits in a
financial institution, they are not completely risk-free. So one must check the
CRISIL rating and company history, company balance sheet and past company
record before investing in NCD’s. Normally NCD’s come with a maturity date and
a rate of interest (referred to as coupon)
NCD’s are listed in the stock market as well so
these are highly liquid in nature. One can trade NCD’s on the stock exchange.
Yield to maturity(YTM) is the return rate of
interest which the investor will receive, if the NCD is held until maturity.
Normally the interested accumulated is re-invested so the YTM compounds over
time.
A rule of thumb is to choose a NCD which has a AAA
CRISIL rating and invest only if the YTM is more than the FD rates in public
financial institutions.
Any income earned
from NCD’s are taxable at a fixed rate of 10% (with indexation) if sold after 1
year of holding. If sold in the same financial year then the profit is added to
the taxable income and tax charged will be treated as per the income slabs.
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