When people think about investing, they often look for a balance between safety and good returns. feel secure but usually offer low growth, while the stock market can be unpredictable. Because of this gap, many investors are now turning their attention to non convertible debentures, which offer fixed income with relatively better returns over a set period.
These are issued by companies to raise money and, in return, investors receive regular interest payments until maturity. However, before investing, it is important to understand how they work, what kind of returns they offer, and the risks involved. This blog explains everything you need to know about non convertible debentures, helping you decide whether they fit your financial goals.
Non convertible debentures are a type of debt investment where an investor lends money to a company for a fixed period and earns interest in return. When you invest in these debentures, you act as a lender, not a shareholder. The company pays interest at a pre-decided rate and repays the principal amount on the maturity date.
To understand the non convertible debentures meaning, it is important to know that these instruments cannot be converted into company shares at any time. This feature makes returns more predictable compared to equity-based investments. These are often chosen by investors who are looking for stable income and relatively lower risk than the stock market, while still aiming for better returns than traditional savings options.
It work on a simple lending principle. A company issues these debentures to raise money for its business needs, and investors buy them by investing a fixed amount. In return, the company agrees to pay interest at a fixed rate for a specific period and repay the principal amount at maturity. Since these convertible debentures are not linked to company shares, their returns do not depend on stock market movements.
Here is how non convertible debentures usually work step by step:
The interest and repayment depend on the financial strength of the issuing company, which is why credit ratings play an important role. Higher-rated debentures are considered safer but usually offer slightly lower interest, while lower-rated ones may offer higher returns with higher risk.
Suppose a company issues non convertible debentures with an interest rate of 10 percent per year and a tenure of 5 years. An investor decides to invest Rs. 1,00,000 in this issue.
In this case, the investor will earn Rs. 10,000 every year as interest. If the interest is paid annually, the investor will receive this amount each year for five years. At the end of the 5-year tenure, the company will return the original investment of Rs. 1,00,000 to the investor, along with the final interest payment if applicable.
Non convertible debentures are mainly classified into two types based on the level of security offered to investors. Knowing these types is important because it directly affects the safety of your investment and the risk involved.
1. Secured Non Convertible Debentures: These are backed by the assets of the issuing company. This means that if the company fails to repay the money, investors have a claim on the company’s assets. Because of this added security, these debentures are considered relatively safer and usually offer slightly lower interest rates. These are often preferred by conservative investors who focus more on capital protection.
2. Unsecured Non Convertible Debentures: They are not backed by any specific assets of the company. In case of default, investors do not have priority over company assets. Due to the higher risk involved, these debentures generally offer higher interest rates to attract investors. These are suitable for investors who are willing to take higher risk in exchange for better returns and have assessed the company’s financial strength carefully.
The main difference between convertible and non convertible debentures lies in conversion rights. Non convertible debentures cannot be converted into company shares and offer fixed interest income. Convertible debentures, on the other hand, can be converted into equity shares after a certain period, linking returns partly to stock market performance.
In short, non convertible focus on stable income, while convertible debentures combine debt with equity potential.
| Basis of Difference | Non Convertible Debentures | Convertible Debentures |
|---|---|---|
| Conversion into shares | Cannot be converted into equity shares | Can be converted into equity shares |
| Nature of returns | Fixed and predictable interest income | Returns depend on share price after conversion |
| Risk level | Lower risk compared to equity | Higher risk due to market exposure |
| Interest rate | Usually higher | Usually lower |
| Suitability | Suitable for income-focused and conservative investors | Suitable for investors seeking growth and willing to take risk |
| Impact of stock market | Not affected by stock market movements | Affected by stock market performance |
The non convertible debentures interest rate is the fixed return an investor earns by lending money to a company. In usual cases, they offer interest rates in the range of 8 percent to 12 percent per year, depending on the company, credit rating, and tenure. This rate is decided at the time of issue and remains unchanged throughout the investment period.
Important points to understand about NCD interest rates:
Higher interest rates should always be checked along with the company’s financial strength, as better returns often come with higher risk.
Before investing, it is important to understand the non convertible debentures risk factors. Although these instruments offer fixed income, they are not completely risk-free. Knowing these risks helps investors make better and safer decisions.
Key risk factors:
Investing in non convertible debentures is straightforward once you know the available options in India. These instruments are regulated and can be purchased through recognised channels, making them accessible to both new and experienced investors.
Things to check before investing:
Knowing non convertible debentures taxation is very important because taxes can significantly affect your actual returns. In India, the tax treatment depends on whether the debentures are listed or unlisted and how long you hold them.
1. Tax on interest income: Interest earned from these debentures is fully taxable as per the investor’s income tax slab rate. This interest is added to your total income and taxed accordingly. For most investors, there is no special exemption on NCD interest income.
2. Tax on capital gains: If you sell non convertible debentures before maturity, capital gains tax applies.
3. Tax deduction at source (TDS): For resident investors, TDS is generally not deducted on interest earned from listed non convertible debentures held in demat form. However, TDS may apply in certain cases for unlisted NCDs or when interest is paid through specific modes.
Due to these rules, investors should not look at interest rates alone and must consider post-tax returns while investing in non convertible debentures. Consulting a tax professional is also advisable for personalised tax planning.
This investment option is suitable for people who are looking for stable income and predictable returns over a fixed period. It works well for investors who do not want daily exposure to stock market ups and downs and prefer clarity on interest payouts and maturity value.
Investors who may find this suitable include:
However, this option may not be ideal for investors who need high liquidity, want rapid capital growth, or are uncomfortable with credit-related risks. Such investors may find equity-based instruments or mutual funds more suitable for their goals.
Many investors focus only on returns and ignore important factors, which can lead to poor investment decisions. Being aware of these common mistakes can help avoid unnecessary losses.
Non convertible debentures offer a clear investment option for those seeking fixed income with better returns than traditional savings instruments. They provide predictable interest, defined tenure, and priority over shareholders during repayment. However, returns are closely linked to the financial strength of the issuing company, making credit evaluation essential. Interest rates may look attractive, but risk factors such as liquidity and taxation should always be considered.
When chosen carefully, these instruments can play a useful role in building stable income within a diversified portfolio. A disciplined approach focused on safety and suitability helps investors use them effectively for long-term financial planning.
Non convertible debentures are fixed-income instruments issued by companies to raise funds. Investors earn regular interest at a fixed rate and receive the principal amount at maturity, without any option to convert the investment into company shares.
The safety of non convertible debentures depends on the credit rating and financial stability of the issuing company. Higher-rated issues are generally considered safer, while lower-rated ones carry higher risk but offer higher returns.
Returns from non convertible debentures come from fixed interest payments made by the issuing company. These payments can be monthly, quarterly, annually, or at maturity, based on the terms of the issue.
Yes, listed non convertible debentures can be sold on stock exchanges before maturity. However, liquidity may vary, and the selling price depends on market demand and interest rate movements.
Interest earned from non convertible debentures is taxed as per the investor’s income tax slab. If sold before maturity, capital gains tax applies based on whether the debentures are listed or unlisted.
Non convertible debentures are suitable for investors seeking stable income, predictable returns, and lower exposure to stock market volatility, provided they understand the associated credit and liquidity risks.
Disclaimer: This article is intended for educational purposes only. Please note that the data related to the mentioned companies may change over time. The securities referenced are provided as examples and should not be considered as recommendations.
