NCDs - Non Convertible Debentures l Tax implications and TDS on NCD

 What are NCDs?  

Non-convertible debentures (NCDs) are debt instruments with a fixed tenure issued by companies to raise money for business purposes. Unlike convertible debentures, NCDs can't be converted into equity shares of the issuing company at a future date.

 What's the difference between NCDs & FDs?  

Following are the differences between an NCD and an FD:

Liquidity: In contrast to a NCD, FD can't be sold in the market. As NCDs are listed on a stock exchange, you can sell them any time you want. Even bank FDs are highly liquid and can be encashed before maturity however with lesser interest.

Safety: While NCDs are secured debt, corporate FDs are altogether unsecured and bank FDs are secured to the extent of Rs One Lakh only, for both principal and interest amount for each depositor in a bank.

Taxation: There is difference in taxation aspect also. In addition to interest income, there can be capital gains if you sell the NCD before maturity. However, unlike FDs, there is no TDS in case of listed and dematerialised NCDs.

What are income tax implications? How the returns from NCDs are taxed?  

There can be two types of income from NCDs:

First is the interest income from a NCD and tax treatment is exactly similar to any other interest income such as interest income from FDs. In other words, interest income from NCDs will be subjected to tax at normal rates by including it in 'Income from other sources'.

Next is capital gains. If you decide to sell the NCDs on the stock exchange, capital gains can also arise. If NCDs are sold within a period of 12 months from the date of allotment, short term capital gains / loss (STCG) will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG).

While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD (a listed security) are taxed at concessional rates u/s 112 of IT Act.

Long term capital gains on listed securities are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. However, as the benefit of cost indexation is not available in case of bonds and debentures; therefore, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.

 Why there is no TDS on interest income from NCDs? 

As per section 193 of the Income Tax Act, 1961, there is no tax deduction at source from any securities issued by a company in a dematerialized form and listed on a recognized stock exchange in India.

However, NCDs allotted to non-resident Indians (NRIs) will be subject to tax deduction at source as per section 195 of the Income Tax Act, 1961.