What is an NCD (Non-Convertible Debenture)? Complete Guide for Indian Investors

A Non-Convertible Debenture (NCD) is a long-term fixed-income debt instrument issued by companies and NBFCs (such as Muthoot Finance, Edelweiss, Cholamandalam, and Tata Capital) to raise fixed-term capital from the public. Unlike convertible debentures, NCDs cannot be converted into equity shares at maturity; investors receive periodic interest (coupons) and get their principal capital repaid upon tenure maturity.

1. Secured vs Unsecured NCDs

The primary safety consideration in NCD investing is the collateral backing the instrument:

  • Secured NCDs: Backed by a first or pari-passu charge on the issuer's tangible assets (loans, property, or receivables). If the issuer defaults, the debenture trustee can liquidate assets to recover investor funds. Typically considered significantly safer.
  • Unsecured NCDs: Not backed by physical collateral. In the event of company insolvency, unsecured bondholders rank as general creditors behind secured lenders. To compensate for this heightened credit risk, unsecured tranches offer a 50 to 150 bps higher coupon yield.

2. Understanding Credit Ratings (CRISIL, ICRA, CARE, India Ratings)

Under SEBI regulations, every public NCD issue must secure credit ratings from at least one recognized credit rating agency before bidding opens:

  • AAA / CRISIL AAA / ICRA AAA: Highest degree of financial safety and lowest credit default risk. Issuers are market leaders with pristine balance sheets.
  • AA+ / AA / AA-: High degree of safety with very low credit risk. Strong operating cash flows and manageable leverage.
  • A+ / A / A-: Adequate degree of safety, though more vulnerable to adverse economic cycles.
  • BBB / Below: Moderate credit risk or speculative grade. Individual retail investors should generally avoid ratings below AA.

3. Interest Payment Frequencies & Series Options

NCD public issues typically offer investors 6 to 12 distinct series with varying durations (24 months, 36 months, 60 months, up to 120 months) and coupon structures:

  • Monthly Payout: Ideal for retirees and regular cash flow seekers looking for periodic passive income.
  • Annual Payout: Coupon is paid once every 12 months on pre-defined record dates directly to your linked bank account.
  • Cumulative Option: Interest compounds over the tenure and is paid out as a lump sum along with principal on maturity (higher Yield-to-Maturity).

4. How to Apply in a Public NCD Issue

  1. Browse live and upcoming issues on our Public NCD Issues Tracker.
  2. Inspect the credit rating, coupon rate, and series options in the Prospectus or Shelf Tranche.
  3. Log in to your broker's trading app (Zerodha, Groww, AngelOne, Upstox, or ICICI Direct) under the NCD/Bonds tab.
  4. Select your preferred series/tenure and enter the number of debentures (typically minimum application is ₹10,000 for 10 debentures of ₹1,000 face value).
  5. Submit your UPI ID and approve the UPI mandate block before 5:00 PM on the issue closing day.
  6. Track real-time bidding demand across Category I (QIB), Category II (Corporate), Category III (HNI), and Category IV (Retail) on our Live NCD Subscription Page.

5. Taxation of NCD Returns

Interest Income: Taxed according to your individual income tax slab under 'Income from Other Sources'. While listed NCDs held in demat form enjoy zero TDS deduction at source, the taxpayer is obligated to declare the interest earned in their annual ITR.

Capital Gains (Secondary Market Sale): If listed NCDs are sold on the BSE/NSE before maturity, gains held for up to 12 months are treated as Short-Term Capital Gains (taxed at slab rates). Gains held for more than 12 months are Long-Term Capital Gains (LTCG), taxed at a flat 12.5% without indexation benefits.

6. Key Risks to Evaluate

  • Credit & Default Risk: The risk that the NBFC faces asset-quality deterioration or bankruptcy. Always diversify across issuers and insist on AA or AAA ratings.
  • Interest Rate Risk: If the RBI hikes benchmark repo rates, existing fixed-rate NCD bond prices fall in secondary exchange trading.
  • Liquidity Risk: While listed on the NSE and BSE, secondary market trading volume in retail debentures can be thin, leading to wider bid-ask spreads if selling prior to maturity.

Explore current bond offers and coupon rates on our NCD Public Issues Portal and check upcoming dates on the NCD Issue Calendar.

Frequently Asked Questions

Are NCDs safer than Fixed Deposits (FDs)?

Bank Fixed Deposits are insured up to ₹5 Lakh per depositor by DICGC (RBI subsidiary). NCDs do not have DICGC insurance, but secured NCDs with AAA or AA ratings from top NBFCs offer substantial collateral safety and generally provide 1.5% to 3.5% higher coupon yields than standard bank FDs.

Is TDS deducted on NCD interest payout?

For listed NCDs held in dematerialized (demat) format, no Tax Deducted at Source (TDS) is deducted by the issuer under Section 193 of the Income Tax Act. However, the interest remains 100% taxable as per your applicable income tax slab rate.

Can I sell my NCDs on the stock exchange before maturity?

Yes. Listed NCDs trade on the debt market segment of the BSE and NSE. You can place a sell order through your broker during market hours, subject to secondary market trading liquidity.

Last updated 2026-10-25. Information only, not investment advice.