It’s raining NCDS this year

If you are in the highest tax bracket, avoid investing in nonconvertible debentures

MUMBAI:HAVE you come across the word non-convertible debentures (NCDS)? This year, there has been an increase in the number of NCDS from financial companies for retail investors.

Industry experts attribute it to the regulatory changes that Securities Exchange Board of India (Sebi) introduced through which the rules have been eased to allow access for public issues for retail investors. Also, for companies, it is a better way to diversify and raise a large amount of money for the company. “Most NCDS come from non-banking financial companies. For many of these companies, historically, there have been two sources of financing—banks and capital markets. Typically, in a capital market, the larger quantity of funding is for short tenure. For companies to access market for long term, but through retail and not wholesale, NCDS make sense,” said R Sivakumar, head-fixed income and products, Axis Asset Management Co. Ltd.

WHAT IS NCD?

NCDS are fixed-income instruments where you are promised a certain interest for a particular tenure while investing. When companies want to raise money for various needs such as expansion, they look at taking the NCD route—basically asking for money from investor. In return, you get interest on the money you have invested through the NCD on maturity. The NCD is a promise that the company will pay back the money at a certain promised interest rate to you. Currently, Aadhar Housing Finance Ltd, Indiabulls Commercial Credit Ltd and Tata Capital Financial Services Ltd offer NCDS. Usually, it is offered for a limited duration. There are three tenure—3-year, 5-year and 10-year—options. Interest rate ranges between 8.66% and 9.75%, depending on the company, tenure of investment and payout options. In case of payout, you can pick monthly, annual or cumulative. Monthly option works well for those who are looking for a regular income.

HOW TO CHOOSE?

Unlike a bank fixed deposit, you have to do some research here. “While investing in public issue of NCD, investors should consider the reputation of the company, its promoters and their track record. Also, check whether the company has been profitable in the past five years or not. Analyse the company’s present financial, credit and operating metrics. A company with stable-to-growing sales and profit margins should be preferred. Look for dual credit ratings from reputable credit rating agencies. If an instrument has credit ratings from two independent rating agencies, it means two sets of professionals have reviewed the credit on relevant parameters,” Dhawal Dalal, chief investment officer-fixed income, Edelweiss Asset Management Co. Ltd.

Look at the credit rating of the company and evaluate whether you want to take the risk. “For as long as I have been in the industry, I have been hearing that only three things matter while investing—safety, liquidity and returns. You have to judge what is the relative merit. Like any other investment product, you should spend time to understand this one too,” said Sivakumar.

SHOULD YOU GO FOR IT?

If you evaluate the interest rate of NCDS that are currently available in the market, the rates are better than bank FDS. Also you will get higher returns if you opt for cumulative returns compared with a monthly or an annual payout option. However, remember that you will be investing for a longer duration. Also, NCDS will be taxed at slab rate. This means if you fall under the 30% tax bracket, the interest you earn from the NCD will be taxed at 30% too. You will also have to factor in cess for tax.

“If the interest coupon of an NCD is 9.10% an annum, by factoring in income tax at various slab rates, the effective return works out to roughly 8.6% for the 5% tax slab, 7.2% for 20% tax slab and 6.26% for 30% tax bracket, including cess at 4% without considering surcharge applicable on total income when it exceeds ₹50 lakh,” said Archit Gupta, founder and chief executive officer, Cleartax.in.

Considering tax, if you are in the 30% tax bracket, you should avoid NCDS.

WHAT IS IT?

It is the income tax to be paid in installments according to due dates provided by the income tax department, instead of a lump sum at the end of the year. It is paid in advance for the ongoing financial year. The instalments are to be paid in this order – 15% of advance tax, 45%, 75% and the final one 100%, on or before 15th of June, September, December and March.