Conceptual · Article 2.1.5.3
All About Non-Convertible Debentures.
A Company's IOU That Pays More Than a Bank, Because No One Is Insuring It.
Published as on 9 July 2026
A Non-Convertible Debenture is a formal loan you make to a company: you hand over your capital for two to ten years, collect interest along the way, and get your principal back at maturity, all held in your own demat account. Unlike a convertible debenture, it can never turn into equity, so you stay a lender, never an owner. NCDs are regulated by SEBI and public issues must carry a credit rating, but they are not insured the way a bank fixed deposit is. That is the whole bargain: yields of 8-10.5% instead of an FD's 7-7.5%, in exchange for taking on the company's credit risk. This is a guide to what an NCD is, what it pays, how it is taxed, the risks it carries, and how to buy one intelligently.
2-10 Yrs
Typical Fixed Tenure
8-10.5%
Typical Public-Issue Yield
No Insurance
Unlike a Bank FD's DICGC Cover
Slab / 12.5%
Interest at Slab · Listed LTCG
Executive Summary · Page 2
Executive Summary · 7 Findings
An NCD is not a higher-paying fixed deposit. It is a loan to a company, with the company's ability to repay as your only real security. The extra yield over an FD is not a bonus, it is the price of that credit risk, and the credit rating is the single most important thing you read before you invest.
This article covers what an NCD is and how it works, why companies issue them, the three type dimensions, where NCDs fit against FDs and G-Secs, the three core risks, how interest and capital gains are taxed, how to buy and evaluate an issue, and the mistakes that cost investors most.
Key Findings
You are a lender, not a shareholder, and it never converts.
Invest Rs 1 lakh in a 9%, five-year NCD and the company owes you interest plus your principal at the end, nothing more. You get no voting rights and no share of upside. "Non-convertible" means it can never turn into equity, unlike a convertible debenture. It is a fixed contract, not an ownership stake.
SEBI regulates NCDs, but no one insures them.
Public NCD issues are regulated by SEBI and must carry a rating from CRISIL, ICRA, CARE, or India Ratings. But there is no DICGC cover: where a bank FD insures Rs 5 lakh per depositor per bank, an NCD insures nothing. If the issuer fails, recovery depends on security backing and the insolvency queue.
Yields run 8-10.5%, and higher always means higher risk.
As of early 2026, public-issue NCDs pay roughly 8.2-8.7% at AAA, 9-10.5% at AA, and more below that. The extra yield is compensation for default risk, not a free lunch. A BBB issuer defaults several times more often than a AA one. Chasing an extra 1-2% by dropping rating is the classic mistake.
"Secured" means better recovery, not "safe".
Secured NCDs are backed by company assets and may recover 50-70% in insolvency if the collateral is high-quality property; unsecured NCDs leave you a general creditor. But security only helps after a default, it does not prevent one. A AAA unsecured NCD is safer than a BBB secured one. Rating beats security.
Three risks decide everything: credit, liquidity, and interest-rate.
Credit risk is the company failing to pay, IL&FS, once AAA, defaulted in 2018. Liquidity risk is being unable to sell mid-term without a 2-4% discount on a thin exchange. Interest-rate risk is your price falling when new NCDs pay more. Hold to maturity and the last two largely disappear; the first never does.
Interest is taxed at your slab, and there is no 80C relief.
NCD interest is added to income and taxed at your slab; TDS of 10% applies above Rs 5,000 from a single issuer. A 9% NCD nets roughly 6.3% for a 30%-bracket investor, below PPF's tax-free 7.1%. Sell a listed NCD after 12 months and gains are LTCG at 12.5% without indexation. Cumulative interest is still taxed yearly on accrual.
NCDs are a satellite, not the core of your debt allocation.
They belong in the corporate-credit layer, above your emergency and safety buckets, capped at roughly 20-30% of debt and never more than 5-10% in a single issuer. Diversify across issuers and sectors, insist on investment-grade ratings, and only commit money you can lock to maturity.
Full analysis continues across Parts I to V below
At A Glance
| Metric | Value | Detail |
|---|---|---|
| Instrument | Corporate Debt | You lend; you are a creditor |
| Typical Tenure | 2-10 Years | Fixed term to maturity |
| Typical Yield | 8-10.5% | Public issues, by rating |
| Regulator | SEBI | Rating mandatory for public issues |
| Deposit Insurance | None | vs Rs 5L DICGC on bank FDs |
| Interest Tax | At Slab | TDS 10% above Rs 5,000 |
| Listed LTCG (>12m) | 12.5% | Without indexation |
Exhibit 01: Yield Rises With Credit Risk
| Credit Rating | Typical Yield | Risk |
|---|---|---|
| AAA (highest safety) | 8.2-8.7% | Very low default risk |
| AA | 9.0-10.5% | Low default risk |
| A | 10.5-11.5% | Moderate default risk |
| BBB and below | 12%+ | Significantly higher risk |
Indicative public-issue yields, early 2026, same tenure. Illustrative. ADWIZR analysis.
The Opening · Page 3
The Opening
A Non-Convertible Debenture is best understood as a formal loan agreement between you and a company. When you invest Rs 1 lakh in an NCD offering 9% for five years, you become a lender, a creditor, not a shareholder. You get no voting rights and no share of profits. The company's obligation is precise: pay you interest on schedule and return your Rs 1 lakh at the end of five years.
That is the opposite side of the equity coin. With shares you buy ownership and ride the company's fortunes up and down. With an NCD you are simply owed money, and the word non-convertible is a promise that this debt can never be turned into shares, unlike a convertible debenture. If the company triples in value, an NCD holder still receives nine percent, nothing more, nothing less.
Legally, NCDs are debt instruments regulated by SEBI, and most public issues must carry a credit rating from agencies like CRISIL, ICRA, or CARE. Companies issue them to diversify away from banks, to borrow for longer, seven to ten years where banks prefer three to five, and sometimes to borrow more cheaply: a AAA issuer might raise money at 8-9% through an NCD versus 9-11% on a bank loan.
"An NCD pays more than a bank fixed deposit for one reason and one reason only: no government agency stands behind it. The extra yield is the price of the company's credit risk, and the credit rating is where you read that price."
The Central Bargain
What an NCD is not: it is not a fixed deposit with a better rate (an FD carries DICGC insurance; an NCD carries none), it is not guaranteed by anyone (only the issuer's balance sheet backs it), and "secured" does not mean "safe" (it only means better recovery if things go wrong). It is corporate credit, and it must be treated as such.
Structure
Part I
What an NCD Is, Why Companies Issue It, and the Types
Part II
Where It Fits, Typical Yields, and NCD Versus FD
Part III
The Three Risks: Credit, Liquidity, Interest-Rate
Part IV
Taxation of NCD Interest and Capital Gains
Part V
How to Invest, Ratings, Selling Early, and Mistakes
Part VI
The Verdict: When an NCD Earns Its Place
What an NCD Gives You
✓ A fixed, contractual interest rate
✓ Higher yield than a bank FD
✓ A credit rating you can read
✓ Listing, so it may be tradable
What It Does Not Give You
✕ Deposit insurance (no DICGC cover)
✕ Any equity upside or conversion
✕ Guaranteed liquidity before maturity
✕ Safety from a default, even if secured
Part I
What an NCD Is and How It Works
The loan mechanics, why companies issue NCDs instead of borrowing from banks, and the three ways they come packaged.
Part I: What an NCD Is and How It Works · Page 4
The Loan Mechanics
Think of an NCD as a contract with three moving parts. Your role: you are the lender, and you give up ownership rights in exchange for a promise to be paid. The company's obligation: pay interest, monthly, quarterly, or annually, and return your principal at maturity. The key difference from shares: you are owed a fixed sum, not a claim on the company's growth.
Because it is debt, an NCD sits ahead of equity in the repayment queue if the company fails, and public issues must be rated by CRISIL, ICRA, CARE, or India Ratings before they reach you. That rating is the compressed verdict of professionals on how likely you are to be repaid.
Why Companies Issue NCDs
Cost and diversification: a AAA-rated company might borrow from retail investors at 8-9% through NCDs while a bank loan costs 9-11%. That 100-200 basis-point gap can save crores on a large borrowing, and it reduces dependence on any single lender.
Longer tenure: banks typically prefer three-to-five-year loans; NCDs stretch to seven or ten years. A housing finance company like LIC Housing lends for 15-20 years and issues NCDs to match those long assets with long liabilities.
"When a company skips the bank and borrows straight from you, it is buying cheaper, longer money. Your job is to be paid enough for the risk the bank was pricing all along."
Why the Instrument Exists
The Three Type Dimensions
NCDs vary along three axes. Read all three before you invest, because they change your risk and your cash flow.
1. Security Backing
Secured NCDs are backed by company assets, land, machinery, receivables, which can be sold to repay you; high-quality immovable property may recover 50-70%. Unsecured NCDs pledge nothing, leaving you a general creditor. Secured means better recovery, never guaranteed safety.
2. Interest Structure
Cumulative: interest accumulates and is paid with principal at maturity, Rs 1 lakh at 9% for five years becomes about Rs 1,53,862. Non-cumulative: interest is paid out regularly, so you receive Rs 9,000 a year and get your Rs 1 lakh back at the end. Retirees prefer payouts; accumulators prefer cumulative.
3. Rate Type
Fixed-rate NCDs lock the rate for the full tenure, the most common form, 9% a year regardless of the market. Floating-rate NCDs track a benchmark such as the RBI repo rate, so "repo + 2%" pays 8.5% at a 6.5% repo and 9% if repo rises to 7%.
| Dimension | Option A | Option B |
|---|---|---|
| Security | Secured | Unsecured |
| Interest | Cumulative | Regular payout |
| Rate | Fixed | Floating |
Part II
Where It Fits and What It Pays
The corporate-credit layer of a debt portfolio, the yields you can realistically expect, and how an NCD stacks up against a bank fixed deposit.
Part II: Where It Fits and What It Pays · Page 6
The Corporate-Credit Layer
NCDs belong in the corporate-credit layer of your debt allocation, the yield-enhancement bucket, not the safety or emergency bucket. Above them sit liquidity (savings, liquid funds, T-bills) and core safety (government bonds, SDLs, PPF); below them sits equity for growth. NCDs earn a little more than safety instruments by taking a little more risk.
The practical guardrails matter. Most advisers cap corporate credit, including NCDs, at 20-30% of the total debt portfolio, and never more than 5-10% in a single issuer's NCDs. On a Rs 50 lakh debt portfolio, that might mean Rs 5 lakh liquid, Rs 30 lakh core safety, and Rs 15 lakh corporate credit, of which perhaps Rs 7-8 lakh is NCDs spread across three or four issuers.
What You Can Realistically Expect
As of early 2026, public-issue NCD yields run 8-10.5%, climbing with credit risk. In 2024, Bajaj Finance (AAA) offered roughly 8.5-8.8% for five years, while Shriram Finance (AA+) offered around 9.25% for the same tenure. The higher number is always paying you for something, more default risk.
And remember the after-tax reality: a 9% NCD in the 30% bracket nets about 6.3%, so the headline yield is not what you keep.
NCD Versus Bank FD
Both are fixed-income instruments, but they differ where it counts, in who stands behind them.
| Factor | Bank FD | NCD |
|---|---|---|
| Issuer | Bank (RBI) | Company (SEBI) |
| Insurance | Rs 5L DICGC | None |
| Risk | Very low | Medium |
| Returns | 7.0-7.5% | 8-10.5% |
| Tenure | 7 days-10 yr | 2-10 yr |
| Liquidity | Premature exit (penalty) | Sell on exchange |
| Rating | Not applicable | Mandatory (public) |
Choose an FD When
You need guaranteed capital safety, your amount sits within the Rs 5 lakh DICGC limit, or you might need to withdraw before the term ends.
Consider an NCD When
You can hold to maturity, you are comfortable taking credit risk for extra yield, and you have already used your safe instruments, PPF, government bonds, and FDs within the insured limit.
Part III
The Three Risks
Credit risk never leaves you; liquidity and interest-rate risk mostly bite only if you sell before maturity. Know all three before you commit a rupee.
Part III: The Three Risks · Page 8
Credit and Liquidity Risk
Credit risk (default)
The company may struggle to pay interest or return principal. IL&FS NCDs, rated AAA at first, defaulted in 2018; by late 2025 aggregate group recovery stood at roughly 20-35%, varying by entity. Manage it by staying investment-grade (BBB- and above), diversifying across three or four issuers, and reviewing ratings quarterly.
Liquidity risk (hard to sell)
Listing does not guarantee a buyer. A thin NCD might trade only Rs 50,000-1 lakh a day with a 2-3% bid-ask spread, forcing you to accept a discount for immediate cash. Only commit money you can lock to maturity, check historical trading volumes first, and keep emergency funds elsewhere.
The "Dirty Price" When You Trade Mid-Year
Buy or sell between interest dates and you pay or receive the dirty price: market price plus accrued interest since the last payout. An NCD quoted at Rs 100 that has accrued Rs 4.50 of interest actually changes hands at Rs 104.50 per unit.
Interest-Rate Risk
Interest-rate risk (price moves)
Sell before maturity and the price moves inversely with rates. Buy an NCD at Rs 100 paying 9%; if new issues later pay 10% because RBI raised rates, yours trades below par, maybe Rs 97-98, because buyers can get 10% elsewhere.
The Arithmetic of a Rate Rise
Rs 1 lakh in a five-year NCD at 9%. After one year, rates rise to 10%. Sell now and you might get only Rs 97,000-98,000, a 2-3% loss. Hold to maturity and you still get your full Rs 1 lakh back. The loss is only real if you sell.
How to Manage It
Plan to hold to maturity, which neutralises price risk entirely. If you expect rates to rise, prefer shorter tenures so your capital returns sooner and can be redeployed at the new, higher rate.
Part IV
Taxation in India
Interest at your slab, TDS above Rs 5,000, capital gains if you sell early, and the accrual trap that catches cumulative-NCD holders.
Part IV: Taxation in India · Page 10
Interest Taxed at Your Slab
All interest from an NCD is added to your annual income and taxed at your slab rate. Under the new regime the slabs run 5%, 10%, 15%, 20%, and 30%, so the same Rs 50,000 of interest costs a 5%-bracket investor Rs 2,500 and a 30%-bracket investor Rs 15,000.
| Annual Income | Slab | Tax on Rs 50,000 |
|---|---|---|
| Rs 8 lakh | 5% | Rs 2,500 |
| Rs 15 lakh | 20% | Rs 10,000 |
| Rs 25 lakh | 30% | Rs 15,000 |
TDS (Tax Deducted at Source)
If annual interest from a single issuer exceeds Rs 5,000, the issuer deducts 10% TDS before paying you. You claim it as credit when you file your return, so it is a timing effect, not an extra tax.
No 80C Relief, and the Post-Tax Reality
NCDs get no 80C deduction, unlike ELSS or PPF, and interest is fully taxable. A 9% NCD nets about 6.3% for a 30%-bracket investor, below PPF's tax-free 7.1%, so high earners should compare after-tax, not headline, yields.
Capital Gains and the Accrual Trap
If you sell a listed NCD on the exchange before maturity, capital gains rules apply on top of the interest already taxed.
Short-Term (held < 12 months)
Gains are added to income and taxed at your slab rate, exactly like the interest.
Long-Term (held > 12 months)
Gains on a listed NCD are taxed at 12.5% without indexation, per the Finance Act 2024. The 12-month holding threshold makes listed NCDs long-term relatively quickly.
Tax treatment here reflects rules as of July 2026; confirm the current position with a qualified professional before acting.
Part V
How to Buy and Evaluate
The two ways in, the credit rating you should insist on, whether you can really sell before maturity, and the mistakes that cost investors most.
Part V: How to Buy and Evaluate · Page 12
Two Ways to Invest
Primary market (new issue)
Apply during a company's public subscription window, typically 5-10 days. Open a demat account with any SEBI-registered broker, watch NSE and BSE for upcoming issues, apply online, and receive the NCDs in demat within two to three weeks. The advantage: you buy at face value, usually Rs 100 or Rs 1,000 per unit.
Secondary market (exchange)
Buy already-issued NCDs from existing holders on NSE or BSE, just as you would a share; they settle to your demat in T+1. The advantage is timing, you can invest any day. The disadvantage is price: you may pay a premium or get a discount, and thin issues can be hard to buy or later sell.
Liquidity Check Before You Buy
Look for average daily volume of at least Rs 50 lakh-1 crore, 20-30 trades a day, and a bid-ask spread under 1% (over 2% is a warning). Below Rs 10-20 lakh of daily volume, selling later can be difficult.
The Rating You Should Insist On
Credit ratings are your primary tool for judging default risk, and SEBI mandates them for public issues. Never chase an extra 1-2% by dropping from AA to BBB: historical data shows BBB issuers default three to four-and-a-half times more often than AA over three years. And watch the outlook: a "AA (Negative)" is an earlier exit signal than the downgrade itself. In 2018, investors who sold IL&FS on the first downgrade lost 10-15%; those who held lost 70-80%.
Rating Scale and Common Mistakes
| Rating | Meaning | Suited To |
|---|---|---|
| AAA | Highest safety | Conservative |
| AA | High safety | Most retail |
| A | Adequate safety | Some risk appetite |
| BBB | Moderate safety | Higher risk appetite |
| BB and below | Speculative | Generally avoid |
Can you sell before maturity? Yes, most public NCDs are listed on NSE and BSE and can be sold in market hours, but listing does not guarantee liquidity. A large, popular issue may trade Rs 50 lakh-1 crore a day at a 0.5-1% spread; a small one may need a 2-4% discount and several days; a very thin one can leave you stuck until maturity.
Chasing the highest rate
The extra 3% on a BBB- issue over a AAA is not a bonus, it is compensation for far higher default risk. Set a minimum rating (say AA-) first, then compare yields only within it.
Treating an NCD like an FD
FDs carry Rs 5 lakh DICGC insurance; NCDs carry none. Cap NCDs at 20-30% of your debt, not 80-90%.
Ignoring concentration
Five NCDs all from NBFCs or real estate is not diversification. Spread across sectors and company sizes so one sector's stress cannot sink the lot.
Confusing "secured" with "safe"
Security aids recovery after default; it does not prevent one. Prioritise rating over security, and always check the after-tax yield.
Part VI
The Verdict
Where an NCD earns its place, and the simple rules that keep it from becoming a mistake.
Part VI: The Verdict · Page 14
The Assessment
An NCD is a good instrument used badly by many investors, because they treat it as a high-paying fixed deposit rather than as corporate credit. Get that one framing right and most of the rest follows. It is a loan to a company, the rating measures how likely you are to be repaid, and the extra yield over an FD is the price of the risk the bank was already pricing.
Used well, NCDs sit in the corporate-credit slice of your debt, capped at 20-30%, diversified across issuers and sectors, held to maturity, and chosen on rating first and yield second. Used badly, they become an over-concentrated, uninsured bet on a single stretched borrower, reaching for an extra 2% that vanishes at the first default.
"The rating is the price of the risk, written in three letters. If an NCD pays far more than its peers, do not ask what you are earning. Ask what you are being paid to accept."
The Only Question That Matters
If you cannot hold to maturity: reconsider, liquidity and interest-rate risk turn against you. If you can hold, want investment-grade issuers, and treat NCDs as a satellite: they can lift the yield on a slice of your debt without upending its safety.
ADWIZR · July 2026
Decision Rules
Set a rating floor, then compare yields
Insist on investment-grade, ideally AA- and above. Only within that floor should yield decide, never the other way round.
Cap the issuer and the sector
No more than 5-10% in any single issuer, and diversify across sectors so one industry's stress cannot take down your whole NCD sleeve.
Match the tenure to your horizon
Only commit money you can lock to maturity; if rates look set to rise, prefer shorter tenures. Keep your emergency fund entirely separate.
Compare after-tax, and mind accrual
Judge a 9% NCD on its ~6.3% post-tax yield in the top slab, and if cumulative, budget to pay the annual accrual tax from other funds.
The Bottom Line
An NCD is a loan to a company that pays more than a bank because no one insures it. Treated as corporate credit, held to maturity, kept investment-grade, diversified, and capped at a fifth to a third of your debt, it can usefully raise your yield. Treated as a better fixed deposit, concentrated and chased for rate, it is where credit risk quietly does its damage. Read the rating, not the headline number.
Investor FAQ
Questions Indian Investors Ask
Seven questions, answered directly.
Investor FAQ · Page 16
Frequently Asked Questions
Q1 Are NCDs better than fixed deposits for senior citizens?
Q2 Can I get a loan against my NCDs?
Q3 What happens to my NCDs if the company merges or is acquired?
Q4 Are NCDs suitable for NRIs?
Q5 How do I track my NCD holdings and rating changes?
Q6 What is the difference between NCDs and corporate bonds?
Q7 Should I reinvest or take interest payouts?
Key Terms & Definitions
Non-Convertible Debenture (NCD)
A SEBI-regulated corporate debt instrument in which the investor lends money to a company for a fixed term, typically 2-10 years, and receives interest plus repayment of principal at maturity. "Non-convertible" means it can never be converted into equity, unlike a convertible debenture, so the holder always remains a creditor.
Secured vs Unsecured NCD
A secured NCD is backed by specific company assets that can be sold to repay holders on default, often recovering 50-70% if the collateral is high-quality property. An unsecured NCD pledges no assets, leaving the holder a general creditor. Security improves recovery after default; it does not prevent default.
Cumulative vs Non-Cumulative
A cumulative NCD accumulates all interest and pays it with the principal at maturity, aiding compounding. A non-cumulative NCD pays interest at regular intervals, monthly, quarterly, or annually, suiting investors who need a steady income stream, such as retirees.
Credit Rating
An independent assessment of an issuer's ability to repay, expressed on a scale from AAA (highest safety) down through AA, A, BBB, and below (speculative). SEBI mandates a rating from CRISIL, ICRA, CARE, or India Ratings for public NCD issues. Higher-rated issuers pay lower yields; the rating, not the yield, is the primary risk gauge.
Rating Outlook
A rating agency's view on the likely direction of a rating over 6-12 months, marked Positive, Stable, or Negative. A Negative outlook is an early warning that a downgrade may follow, and can serve as an exit signal before the actual downgrade arrives.
Dirty Price
The all-in price paid or received when an NCD is traded between interest-payment dates: the clean market price plus the interest accrued since the last payout. An NCD quoted at Rs 100 with Rs 4.50 of accrued interest actually changes hands at Rs 104.50 per unit.
Interest-Rate Risk
The risk that an NCD's market price falls when prevailing interest rates rise, because new issues then offer higher yields. It affects only investors who sell before maturity; those who hold to maturity receive their fixed interest and full principal regardless of rate moves.
DICGC Insurance
Deposit Insurance and Credit Guarantee Corporation cover that protects up to Rs 5 lakh per depositor per bank on bank deposits, including fixed deposits. NCDs carry no such cover, which is the core structural difference that lets them pay higher yields than bank FDs.