28/09/2024 | 4 Comments

Non-convertible debentures (NCDs) are a popular investment choice for people who wish to have fixed returns to grow their money. However, just like any other investment, there are tax rules you need to know before you invest in NCDs. That’s why make sure you understand how NCD taxation works so that you can plan your investments better. In this brief guide, we will explain the tax on debentures so that you are aware of the fundamentals of NCD taxation.


What are Non-Convertible Debentures (NCDs)?

NCDs are a type of loan that companies use to raise money. When you invest in an NCD, you are actually lending your money to the company. In return, the company pays you interest over a fixed period. These debentures are called “non-convertible” as you can’t convert them into company shares. People often go with NCDs as they offer a fixed interest rate, which can be higher than what you get in a savings account. However, you need to keep in mind that NCD taxation rules apply here and the interest you earn would be taxed.


How is Interest on NCDs Taxed?

When you earn interest from NCDs, that interest is added to your total income and then, it is taxed according to your tax bracket. This is known as the tax on NCD. For example, If you are in the 30% tax bracket, your interest income from NCDs would be taxed at 30%.

NCD Tax Rate


TDS (Tax Deducted at Source) on NCDs

As per section 193 of the Income Tax Act, the companies that pay interest on NCDs are required to deduct tax at source (TDS) if the interest is more than ₹5,000 in a financial year. The TDS rate is 10% if you have provided your PAN details. If PAN details are not provided, the TDS could be higher (around 20%).

When filing your income tax return, you can claim the TDS amount if your total income is below the taxable limit and get a refund of the TDS.

Note: NCDs present in demat form are exempted from TDS.


How is Selling NCDs Taxed?

If you sell your NCDs before they mature, you may have to pay a capital gains tax on any profit you make. The tax on debentures when selling depends on how long you have held the NCDs. If you sell your NCDs within 12 months, any profit you make would be taxed as short-term capital gains. But, if you sell your NCDs after 12 months, the gains are taxed as long-term capital gains. LTCG on NCDs is taxed at 20% with indexation. Indexation adjusts the purchase price for inflation, which reduces the amount of tax you need to pay.


Are There Tax-Free NCDs?

No, NCDs are not tax-free. The interest income from NCDs is always taxable. If you sell the NCDs and make a profit, that profit is also subject to tax, either as short-term or long-term capital gains.


Also Read : Tax Saving Short Term Investment Option


Buying NCDs Through the 13Karat App

If you are interested in buying NCDs, the 13Karat app is an easy way to do so. With the help of the app, you can explore and buy NCDs with attractive interest rates. The best part of investing in NCDs with 13Karat is that it offers a 16.1% annual rate of return, which is quite high compared to other investment options,


Conclusion

Non-convertible debentures (NCDs) can provide attractive fixed returns, but it is important to understand the tax treatment of NCDs before investing. If you are looking for an efficient platform for your NCD investment, then the 13Karat app is here to make it easy for you. With 13Karat, invest in NCDs and earn a high annual return of 16.1%. However, make sure you factor in the tax rules before making your investment decisions.