What Are NCDs (Non-Convertible Debentures): Eligibility, Benefits & Taxation

For Non-Resident Indians (NRIs), non-convertible debentures (NCDs) are a reliable, long-term investment option. According to the credit risk of the issuing company, these offer fixed returns to investors. It is a perfect options for individuals looking beyond NRI mutual funds and stocks. Along with Indian residents, subject to FEMA and issue-specific terms, NRIs and people of Indian descent are also eligible to invest in NCDs.

Further, want to know more about non-convertible debentures? Read the blog and get all the information about the NRI investment in NCDs, eligibility rules, and tax implications.

What Are NCDs?

NCD stands for non-convertible debentures. For NRIs, these are one of the most popular investment options in India. These are issued by companies and businesses to raise funds. It helps them obtain capital without diluting their equity.

NCDs come with fixed tenure and interest rates. However, as their name states, non-convertible debentures, you cannot convert them into equity shares. Now, let's know about the different types of NCDs.

Types of NCDs

There are two different types of NCDs, i.e., secured and unsecured NCDs. These are as follows:

• Secured NCDs: These are secured with the assets of the issuing company. This means that, in the event of non-payment or default, subject to legal recovery procedures, investors are liable to make the payment by selling the company's assets.
• Unsecured NCDs: Like their name states, they are riskier than secure NCDs. It is because these are not covered by any assets. However, compared to secured NCDs, you receive higher returns in unsecured NCDs.

Furthermore, let's explore the key facts about NCDs.

Key Facts About NCDs

Here are some of the key facts about NCDs:

• The maturity period of these investments varies depending on the issue and issuer. Generally, it ranges from 90 days to 30 years.
• Through public offerings, or NCD IPO, you can invest in NCDs.
• Compared to fixed deposits (FDs) in the bank, these investments offer greater returns.
• These are marketable instruments that are listed on stock markets.
• Before availing the public, credit rating companies rate NCDs,
• The market of NCDs is controlled tightly. Additionally, the issuance and trading of it are regulated by SEBI and RBI. 
• The complete NCD investment process is done online.
• Only businesses with strong credit ratings offer successful NCDs.
• The allotted NCDs are credited to the demat account of the investor.

This was all about non-convertible debentures (NCDs). Moving ahead, let's know about NRI investment in NCDs.

NRI Investment in NCDs

The Reserve Bank of India (RBI) provides several investment options to NRIs. However, based on the investment, there are specific rules set by the Foreign Exchange Management Act (FEMA) that NRIs need to follow. Considering this, NRIs can invest in non-convertible debentures on a repatriable and non-repatriable basis.

Additionally, if the rules of the issuing company give permission, NRIs and persons of Indian origin (PIOs) can invest in the same company that is selling NCDs.

Further, according to the NCDs eligibility criteria, the applications from people and organizations stated below are rejected. This includes NRIs and other foreign nationals who are:

• Settled in the USA
• Based in the USA
• Nationals/ residents of the USA
• Subject to any taxation laws of the USA

Considering this, NRIs settled in the USA or Canada may face restrictions based on the SEC compliance and FATCA policies of the issuer. This was all about NRI investments in NCDs. Moving further, let's know the NCD eligibility rules for NRIs.

NCD Eligibility Rules for NRIs

In India, NRI investment in NCDs is subject to FEMA rules and regulations set by the RBI. An Indian company or business, through investment in NCDs, can raise funds from PIO and NRI investors. However, for this, they need to fulfill certain conditions. These are as follows:

• The NCDs should be issued by a public offering.
• Interest rates on NCDs are market-linked and subject to SEBI, RBI and issue-specific guidelines.. Additionally, subject to applicable regulatory guidelines, it is determined by the market and issuer conditions.
• NCDs should be redeemed after three years.
• The NCD issuing company should not engage in Transferable Development Rights (TDRs), real estate, Chit Funds, plantations, or agriculture.
• NRIs should invest in NCDs using their funds from NRE, NRO, or FCNR accounts, depending on whether their investment is repatriable or non-repatriable.
• Within 30 days of investments, NRIs need to provide a statement of remittance receipt and the issues of NCDs to the RBI.
• For investment based on a repartition basis, the NRI holding for each service of NCD should not exceed the specific limit for the issue of convertible equity shares for FDI and debentures.

Further, subject to FEMA regulations and issue-specific conditions, NRIs are permitted to invest in NCDs. Considering this, to ensure your eligibility for NCDs as an NRI, it is advisable to carefully check the terms and conditions and the documents.

Now, moving ahead, let's know the tax implications of NCD investment for NRIs.

Tax Implications on NCD Investment for NRIs

When investing in NCDs, NRIs need to follow certain tax rules in India. Considering this, NRIs invested in NCDs are liable to pay two types of taxes. These are as follows:

• TDS: Tax Deduction at Source @20% on earned interest from investments.
• LTCG: Long-term capital gains @20% (on redemption made after three or more years).

Let's better understand the tax implications with an example.

For instance, on your investment, if you received interest of INR 30,000, INR 6,000 will be subject to TDS, and you will receive INR 24,000 in your account. Additionally, before three, you cannot redeem these investments. With this, the redemption terms also depend on the specific issued NCD and whether it is listed or unlisted. So, after three years, when you will redeem it, you need to pay 20% long-term capital gain tax on the income generated from the sale of NCDs.

This was all about tax implications on NCD investment for NRIs. Moving further, let's know the key things NRIs should know before investing in NCDs.

Key Things NRIs Should Know Before Investing in NCDs

Here are some of the key things that NRIs should consider before investing in NCDs:

• Credit Rating Matters: Check the credit rating of the issuer before investment. It is because higher returns often come with higher credit risk.
• Currency Risk: Returns in NCDs are paid in INR, exposing NRIs to currency fluctuation risk.
• Liquidity Considerations: Listed NCDs may have limited trading volumes; this, before maturity, makes exit difficult.
• Reputation of Issuer: Opt for established issuers who have strong repayment history and balance sheets.
• Tax Efficiency: Depending on the resident country and DTAA applicability, post-tax return from investment may significantly differ.
• Documentation and Compliance: It is mandatory to fulfill KYC, CRS, FATCA declarations, and periodic updates.

Further, NRIs, rather than choosing a standalone investment, should be a part of a diversified investment portfolio.

Final Thoughts

Lastly, compared to mutual funds and stocks, non-convertible debentures (NCDs) are more reliable investment options for NRIs in India. NCDs offer a fixed interest rate and tenure period to their investors. Additionally, with these investments, you get higher returns than FDs. However, you are liable to pay TDS and LTCG on NCDs.

Further, being an NRI, if you are facing issues in opening a trading account, connect with Savetaxs. Our financial experts will help you open an investment account. Additionally, they can also assist you in choosing the right investment plan as per your financial goals, time horizon, and risk appetite.