NCD Vs Bonds

NCD vs bonds is a common question among investors looking for fixed income and having long-term financial goals. While both NCD and bond offer a fixed income, there are significant differences between the two in terms of risk, the purpose of issuance and convertibility into shares or equities. 

Understanding NCD Vs Bonds

Bonds are fixed-income investment instruments wherein the investor lends money to the government or a company. The government or the company pays interest to the investor and returns the principal amount on maturity. This makes bonds a secured investment option.

The government usually collects funds from investors in case of a liquidity crisis for government projects. However, the investor receives interest income based on the interest rate or coupon rate from the government. 

Some of these popular companies also issue non-convertible debentures (NCDs) to raise long-term capital. These are fixed-income instruments that offer a comparatively higher interest rate than convertible debentures. 

As NCDs cannot be converted into equity stocks, they are termed non-convertible debentures. They have a specific maturity date when the issuer pays back the principal amount and the interest to the investor.

You can opt to receive interest monthly, quarterly, yearly or on a cumulative basis for your NCD investment. Notably, companies issue these based on their creditworthiness; as a result, no collateral is offered. 

Key Difference Between NCD and Bonds

Here are the differences between NCD vs bonds:

Types of NCD and Bonds

The following are the types of NCD vs bonds:

• Types of Bonds

1. Government Bonds

The Government of India issues bonds to collect funds for developmental projects like infrastructure, power plants and others. These are one of the safe investment options for investors as it is backed by the government. 

1. Corporate Bonds

Corporate houses often issue bonds to collect funds for business expansion or operations. These bonds are corporate bonds offering relatively higher interest rates compared to government bonds. However, the associated risks with corporate bonds are relatively high. 

1. Municipal Bonds

Local authorities issue municipal bonds to raise funds for public infrastructure projects. These projects build roads and bridges within the city with the collected funds. 

1. National Savings Certificate (NSC)

A National Savings Certificate can be considered as a bond. The interest income on these bonds is subject to taxation. However, investors can avail tax deductions under Section 80C of the Income Tax Act of up to ₹1.5 lakh with their investment in NSC. 

1. Tax-free Bonds

Government entities or the government often issue tax-free bonds such as NHAI or REC. Investors can reap the benefits of tax-free interest income with their investment in these bonds. However, the gains are taxable under capital gains tax. 

1. Capital Gain Bonds

Capital gain bonds allow investors to invest long-term capital gains under Section 54EC. This helps investors receive a tax exemption of up to ₹50 lakh. 

1. Floating Rate Bonds

The interest rate of floating rate bonds fluctuates periodically. However, the period of revising the interest rate is determined at the time of issuing the bond. As a result, the interest income of investors varies based on interest rate fluctuations. 

Explore the interest payout options for various bonds now!

• Types of NCDs:

1. Secured Non-convertible Debentures

Secured NCDs are backed by company assets. As a result, these are relatively safer than unsecured NCDs. 

1. Unsecured Non-convertible Debentures

Unsecured NCDs are not backed by company assets. As a result, these are associated with higher risk compared to secured NCDs. 

1. Callable Non-convertible Debentures

The company can redeem callable non-convertible debentures before maturity based on their choice. 

Common Ways to Invest in Bonds and NCDs

Here are the ways to invest in bonds or NCDs:

1. Direct Investment

You can directly purchase bonds or NCDs from the issuer or the secondary market. Ensure you consider your financial goals and risk appetite before choosing a bond or NCD. Further, if you invest in bonds or NCDs directly, consider their credit rating. 

Various rating agencies like CRISIL, Care, India Ratings, ICRA and others provide ratings for bonds and NCDs. Even though the rating scale of each agency differs, a higher rating of a bond or NCD indicates lower risk. 

Check the credit ratings of the bond options available on our platform and start making informed investment decisions today!

1. Mutual Funds

You can choose to invest in bonds or NCDs through mutual funds. It eliminates the investor’s need to understand where to invest. The fund manager of the mutual fund determines the bond or NCD and manages the portfolio. 

Taxation on Bonds and NCDs Based on the Mode of Investment

Here are the applicable taxes on bonds and NCDs based on the mode of investment:

1. Direct Investment

If you invest directly in bonds or NCDs, the interest income is taxable based on your income tax bracket. 

1. Investment Through Mutual Funds and Redemption Before 3 Years

If you invest through mutual funds and redeem the units before one year, it will be considered short-term capital gains. The tax rate will be applicable based on the marginal income tax rate.

1. Investment Through Mutual Funds and Redemption After 3 Years

If you invest through mutual funds and redeem after a year, the gains will be considered long-term capital gains. A 12.5% tax will apply on the gains without indexation. 

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