A Complete guide on NCD: Secured and Unsecured NCDs, Tax implications

No, NCDs neither fall in the category of shares nor fall in the category of bonds. They are a distinct entities.

NCDs can be bought in the primary market as a part of a public issue or they can be bought and sold in the Secondary Market.

In the first case, an individual has to apply for an Initial Public Offer by filling out an online form or via the Application Supported by Blocked Amount (ASBA) route. The method blocks the application amount in your bank account and it keeps earning interest, once allotment is finalized and you have been allotted with NCDs then only the amount will get debited from your bank account, and the NCD will be transferred into your Demat account.

In the case of the secondary market, an investor can purchase and sell NCDs online from the stock exchange through your Demat account.

Yes, NCDs can be sold before maturity and they can again be traded on Stock Exchange. Interest on NCD would be paid to that person who holds NCD on the date of payment of interest.

Generally speaking, A Demat account is required to buy or sell NCDs because the debentures allotted will be transferred to your Demat account. Most NCD issuers prefer issuing NCDs in the Demat mode only.

For Residents Indians holding NCD in Physical form, Income Tax is deductible at source on interest on debentures as per provisions of Section 193 of the Income Tax Act, 1961. However, no income tax is deductible under section 193 in the case of residents where such debentures are in dematerialized form and is listed on a recognized stock exchange.

For Senior Citizens holding NCD whether in physical form or in Demat, no Income Tax is deductible at source on interest on debentures.

In all other cases, tax shall be levied for interest on debentures.

Yes Foreign Institutional Investors are allowed to invest in NCDs. However, it shall be treated as capital gain and accordingly interest shall be levied on FIIs. However, Investments by the FIIs shall be within the limits as may be mentioned in this regard from time to time by the SEBI.

NCDs may mature from short-term to long-term tenure, varies from a minimum time period of 90 days to a maximum period of 20 years.

Bonds are backed by government guarantee whereas the same is not necessary in case of NCDs. But generally speaking, NCDs are also secured to a larger extent if not 100%. However, bonds carry a lower rate of interest as compared to NCBs.

• In case of highly rated company, NCD can be issued by both the Government company or any other public listed company while bonds are backed by the Government's guarantee.
• NCDs have comparatively higher rate of interest (return, coupon rate) than Bonds.
• NCDs cannot be converted into shares whereas convertible bonds are convertible into shares.

NCDs can be issued to the following;

1. individuals, banks, Primary Dealers (PDs), other corporate bodies including insurance companies and mutual funds registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).
2. Investments in NCDs by Banks/PDs shall be subject to approval of the concerned regulators.
3. Investments by the FIIs shall be within the limits as has been set forth by the SEBI.

Yes. NRIs can invest in NCDs subject to the condition that Issuer Company allows NRIs to do so. They can purchase NCDs on repatriable or non-repatriable basis however NRIs based in USA, domiciled in USA, resident or citizen of USA, and subject to any taxation law of USA are not eligible to invest in NCDs.