At the time when interest rates on bank fixed deposits are low, non-convertible debentures (NCDs) offer you a chance to lock your funds at much higher interest rates.  The largest-ever NCD issue of 12,000 crore by Dewan Housing Finance Corp Ltd (DHFL) opens from tomorrow at the interest rate of 8.9 percent to 9.1 percent for the period of 3 to 10 years. It also offers a loyalty bonus of 0.5 percent, 0.7 percent and 1 percent to original subscribers on the tenure of 5, 7 and 10 years, respectively. An additional interest of 0.10 percent is paid to senior citizens taking the effective yield to 9.3 percent.

Is NCD better than FDs? Pradeep Bhadauria, Senior Vice President and Business Head- Retail Liability, DHFL, says, “The interest rate of 9.10% on DHFL NCDs is extremely attractive. The additional incentive along with the fact that it has liquidity too as the bonds will be listed on NSE and BSE makes it even more attractive.” FDs currently offer an interest rate of 6 to 7 percent but rates might go up with an increase in the inflation rate in the country.  However, considering the NCD is tradeable in the market you can always consider investing to cash in on the higher rates.

Last year DHFL’s maiden public issue came in August 2016 when it attracted subscription worth Rs 19,000 crore against the issue size of Rs 4,000 crore. This time DHFL is offering the interest rate of 8.9%, 9%, 9% and 9.1%, for the period of 3, 5,7 and 10 years, respectively. You can choose the tenure depending on your requirement. It offers floating interest rates based on overnight MIBOR benchmark rates plus the spread of 2.16 percent. It is a secured NCD where 65% of the issue will be available to retail and high net-worth individual. The rest will be open for subscription from institutions.

Before investing in NCDs you should also check whether it is secured or unsecured NCD. Holders of secured NCDs have a claim in company’s assets in case of a default at the time of liquidation. Unsecured NCDs, on the other hand, are riskier and hence offer a higher rate of interest than the secured. Similarly, you need to check out ratings as higher rating means less risk- DHFL has AAA rating.

Tax implications on NCD

 The interest income is taxed like the interest earned from bank FDs. But, when you sell it on the exchange within a period of one year then short-term capital gain tax is levied. After one-year long-term capital gains tax is imposed at 20 percent rate with indexation.