NCD Vs FD: What is the difference between the two?
Both Fixed Deposits and Non-Convertible Debentures (NCD) differ based on several aspects. While FDs are comparatively safer and offer assured returns, NCDs are also considered to be secure, offering better competitive rates. Both investment avenues offer a fixed rate of return which are offered either in a cumulative manner or at regular intervals. As investors, you should investigate the features of the products and carefully understand the terms and conditions before you start investing in the financial instruments.
Are you finding it tough to decide whether to invest in FD or NCD? Below are some of the important differences between the two that will help make an informed investment decision.
1. Interest rates
Currently, the interest rates on fixed deposits offered by most banks range between 4-6%per annum for 3-, 5- or 10-years tenure. On the other hand, NCDs offer up to a 9% interest rate or even higher over the same tenure.
NCDs held in Demat are exempted from Tax Deducted at Source (TDS).In case of NCD held in Physical Form, TDS would be deducted if the annual interest payout is more than Rs 5,000. On the other hand, interest income earned from a fixed deposit is fully taxable, if the interest earned (across branches) is over Rs.10,000 in a financial year (unless Form 15G by non-senior citizens/ 15H by senior citizens), this will attract TDS.
Here is how the taxation works: On a bank FD of 7.5%, the post-tax return for the 5%, 20% and 30% tax brackets work out to be 7%, 5.94% and 5.16%, respectively. For NCD offering 9%, the post-tax return for someone in the 5%, 20% and 30% tax brackets work out to 8.5%, 7.12% and 6.2%, respectively.
However, if an investor opts for a 5-year Tax-Saving FD, tax benefits are applicable under Section 80C of the Income Tax Act. In the case of NCDs, there is no such benefit.
Bank FD tenure typically ranges from 7 days to 10 years. Investing in an FD for the longer term may not help you earn as returns as NCDs offer. On the other hand, investing in NCD for a longer tenure provides a substantially higher return. Most NCD tenures range from 1 year to 10 years.
In terms of liquidity, bank FDs are more liquid as one can withdraw the amount before maturity by paying a penalty. Still, there are few FDs that do not allow any premature surrender. Since NCDs are listed on stock exchanges, the low liquidity may impact the exit decision.
Bank deposits are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) upto a certain maximum limit. Money invested in NCDs is subject to the ratings and the nature of the debentures. The quality of an NCD issue depends on the credit rating. Typically, NCDs with a rating of AAA are considered to be safe. The rating is subject to revision or withdrawal at any time by the rating agencies.
Whether you choose to invest in a fixed deposit or a non-convertible debenture, make sure you evaluate the risks associated with it. Risk-averse investors should opt for bank deposits, while those with higher risk tolerance can opt for NCDs only after assessing a company's reputation, financials, ratings.