What Are the Tax Implications of NCD Investment?

Investments involve understanding the potential returns along with how these returns are taxed. Non-convertible debentures (NCDs) are a popular choice for investors seeking fixed returns, but many are unaware of the tax implications that come with them. 

This post highlights the tax aspects of NCD investment that every investor should consider to ensure their investment decisions are as informed as possible.

Understanding NCDs

NCDs are debt instruments issued by corporations to raise capital. Unlike convertible debentures, NCDs do not convert into equity shares of the issuing company. They offer higher interest rates than convertible debentures, making them attractive investments for those seeking stable income. These instruments appeal especially during volatile market conditions, providing predictable returns and lower overall investment risk. NCDs often have shorter maturity periods than fixed-income securities, allowing investors more frequent opportunities for reassessment and reinvestment.

Why Invest in NCDs?
Investors opt for NCDs due to their fixed income and relatively lower risk than equity investments. The stability and predictability of returns make NCDs favoured by conservative investors or those nearing retirement who prioritize capital preservation. 

To start investing in NCDs, one must first undergo demat account opening, as these securities are held electronically, simplifying the transaction and management process, enhancing security and reducing the likelihood of fraud. Electronic management also allows for faster execution of trades and better tracking of investment performance over time.

Tax Implications of NCD Investments

NCDs have tax implications that investors must be aware of. Here’s a detailed overview of the tax implications of NCD investments:

  • Tax on Interest Income
    Interest income from NCDs is taxed under the heading “Income from Other Sources” at your applicable income tax slab rate. It is a crucial factor to consider, as the tax can significantly affect the net returns from the investment.
  • TDS Considerations
    Tax Deducted at Source (TDS) is applicable on the interest earned from NCDs if the total interest exceeds Rs. 5,000 in a financial year. The rate of TDS is 10%. However, the TDS rate will exceed 20% if your PAN is not registered. It’s important to consider this when calculating potential returns.

Capital Gains on NCDs

Capital gains on NCDs arise when an investor sells or redeems the NCDs for a price higher than their purchase cost. Here’s a detailed breakdown of how capital gains on NCDs are taxed:

  • Tax on Sale of NCDs
    The tax treatment of capital gains from NCDs depends on the holding period. If you sell your NCDs within 36 months of purchase, any gain is treated as short-term capital gain and is taxed according to your income tax slab rates.
  • Long-term Capital Gains
    For NCDs held for more than 36 months, gains are treated as long-term capital gains and are taxed at 10% without indexation or 20% with indexation, giving you some relief on the tax front.

Demat Account Opening for NCD Investment

Opening a demat account is essential for investing in NCDs as it allows for the electronic holding and trading of securities. 

1. Opening a Demat Account

To invest in NCDs, opening a demat account is essential. This account holds your NCDs and other securities electronically, ensuring your investments’ safety and simplifying your portfolio’s management and tracking. Electronic holding reduces risks related to physical certificates, such as loss, theft, or damage. Furthermore, it facilitates quicker transactions and provides easy access to your securities anytime, enhancing the overall efficiency of managing your investment portfolio.

2. Choosing the Right Platform

When considering opening a demat account, selecting a platform that offers ease of use, strong customer support, and low fees is crucial. These factors significantly influence your overall investment experience and the net returns on your investments. An intuitive user interface ensures you can manage your investments effortlessly while strong customer support resolves queries or issues swiftly, enhancing your investing journey. 

Lower fees mean more of your money remains invested, potentially increasing your returns. It’s also wise to review additional features such as real-time access to market data, tools for performance tracking, and educational resources which can further benefit your investment strategy.


Investing in NCDs can be wise for those looking for steady returns, but understanding the tax implications is crucial. From income tax on interest to capital gains tax on the sale of NCDs, each aspect of NCD investment taxation needs to be factored into your overall investment strategy. By doing so, you can maximize your returns and minimize surprises regarding tax time. 

Ensure you have a proper demat account to facilitate your investments and keep abreast of the latest tax regulations to make the most of your investment in non-convertible debentures.