What Are Non-convertible Debentures And Capital Gain Bonds

By Author: Maithili Pawar
Total Articles: 33
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Non-convertible debentures (NCD) are fixed-income securities, typically issued in the form of a public issue by high-rated companies to raise long-term capital appreciations. As compared to convertible debentures, non-convertible debentures pay comparatively low-interest rates.

What are Non Convertible Debentures (NCDs)

Non-convertible debentures come under the category of debt. These are not convertible into shares or securities. NCD has a set maturity date, and the interest may be charged following the principal amount either monthly, quarterly or annually depending on the stated fixed term.
These benefit investors as opposed to convertible debentures, with their supreme returns, liquidity, low risk and tax advantages.

Features of Non-convertible debentures

• Taxation: NCDs have fiscal consequences depending on the tax bracket in which the investor falls. If NCDs are sold within one year, or less STCG would apply as per the slab rate of income tax. Unless the NCDs are sold after one year or more or before the date of maturity, LTCG may comply with indexation at 20 per cent.

• Credit rating: Companies are rated by credit rating agencies including CRISIL, CARE etc. It's ranking plays a major role in assessing a company's ability. Higher credit rating means the firm will meet credit obligations. Low credit rating, however, means the company carries high credit risk. If any issuing entity fails to make payments, then they are given less ranking by the rating agencies.

Types of NCDs

• Secured NCDs: Secured NCDs are considered healthier of both types because the company's assets fund their issues. In case the company fails to pay on time, the creditors will recoup their dues by liquidating the assets of the company. The interest in NCDs, however, is low.

• Unsecured NCDs: Unsecured NCDs are far more volatile than the secured NCDs because the company's assets do not cover these. Therefore, when the company defaults on its bill, the creditors have no choice but to wait before payments are collected because there are no company assets to recover their dues. The interest rate on unsecured NCDs, however, is higher than that of secured NCDs.

What is capital gain bonds?

Any income you get from the selling of an asset is a long-term capital gain. The asset could be land, real estate or even investment. You are responsible, under the Income Tax Act, to pay tax on these gains. You will reduce the responsibility of such taxes, however.

To take advantage of tax deductions in the future, invest in section 54EC shares, also widely known as capital gain bonds. The bonds are issued in compliance with the rules of IT Act section 54EC.

Author bio:

Maithili Pawar is a financial expert with 5 years of experience in the investment banking field. In her free time, she writes on trading topics. In this, she has given an overview of non-convertible debentures and capital gain bonds