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Tax implication of NCDs

Updated on July 18, 2023

NCDs, or Non-Convertible Debentures, are debt instruments issued by corporations, financial institutions, or government entities to raise funds from investors. They are fixed-income securities with a specified term and interest rate. NCDs often carry credit ratings, reflecting the issuer’s creditworthiness and the risk associated with the investment enabling investors in making informed decisions. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. NCDs provide investors with regular interest payments and return of principal at maturity, making them an attractive investment option for risk-averse investors and those seeking steady income. They are typically listed on stock exchanges, allowing investors to trade them before maturity, and providing liquidity.

Tax implications of NCDs

Income from NCDS can be in the form of interest income and income from the sale or redemption of NCDs. This is known as capital gains. The tax implications of investing in NCDs are listed here.

Interest income from NCDs –

Interest income from NCDs is taxable in the hands of the investors at their applicable slab rates based on the taxable income levels.

Capital gains –

Short-term capital gains
Tax implications for capital gains from NCDs are based on their holding period. If an investor sells the NCDs within 12 months of purchase, the resulting gains are categorised as short-term capital gains. These gains are then added to the investor’s total income and subjected to taxation at the applicable income tax rate, based on their specific tax slab.

Long-term capital gains
If an investor holds the NCDs for more than 12 months before selling, the resulting gains are considered long-term capital gains. In such cases, these gains are taxed at a lower rate of 10% without the consideration of indexation.