| Overview: This comprehensive guide compares non-convertible debentures (NCDs) with fixed deposits (FDs). It examines returns, safety, taxation, and liquidity. You’ll learn which investment suits your risk profile and financial goals through detailed calculations and real-world examples. |
You walk into any bank branch across India, and fixed deposits remain the go-to investment choice. However, non-convertible debentures have emerged as a compelling alternative, offering higher returns. The Reserve Bank of India data shows that household savings in bank deposits reached ₹17.4 lakh crore in 2023-24. Yet many investors remain unaware of NCD.
Here, you understand the fundamental differences between NCDs and fixed deposits. You’ll examine returns, safety, taxation, and liquidity. We’ll explore when each investment makes sense. Additionally, we’ll provide practical calculations for your decision-making.
What Are NCDs and How Are Fixed Deposits Different?
Non-convertible debentures represent debt securities issued by companies to raise funds from investors. NCDs cannot be converted into equity shares. Investing in an NCD, you lend money to the issuing company for a specific period. You do this at a fixed interest rate.
Conversely, fixed deposits are time deposits offered by banks and financial institutions. When you place money in an Airtel Finance fixed deposit, the institution guarantees your principal and promises predetermined returns.
Returns Analysis: Calculating the Real Difference
Let’s examine actual returns through detailed calculations. Consider investing ₹5 lakh for three years:
Fixed Deposit Calculation
- Principal: ₹5,00,000
- Interest rate: 6.5% per annum
- Tenure: 3 years
- Maturity Amount = P(1 + r)^n = 5,00,000(1.065)^3 = ₹6,03,773
- Total interest earned: ₹1,03,773
NCD Calculation
- Principal: ₹5,00,000
- Interest rate: 9% per annum
- Tenure: 3 years
- Maturity Amount = 5,00,000(1.09)^3 = ₹6,47,295
- Total interest earned: ₹1,47,295
- Additional returns over FD: ₹43,522
| Pro tip: Suppose you’re choosing between two shops. The FD shop guarantees you a profit of ₹103 on every ₹1,000 invested, while the NCD shop promises ₹147 but depends on the shop owner’s business health. |
Safety and Risk Assessment
Fixed deposits offer maximum safety through multiple layers of protection. The Deposit Insurance and Credit Guarantee Corporation covers bank FDs up to ₹5 lakh per depositor per bank. This means even if your bank faces financial difficulties, you receive guaranteed compensation up to this limit.
Non-convertible debentures carry credit risk proportional to the issuing company’s financial stability. Rating agencies like CRISIL and ICRA assign grades from AAA (highest safety) to D (default). AAA-rated NCDs historically demonstrate low default rates, while lower-rated issues carry higher risk.
Risk Hierarchy in Company Insolvency
- Secured NCDs (first charge on assets)
- Unsecured NCDs
- Fixed deposits from NBFCs
- Equity shareholders
| Pro Tip: Always verify NCD credit ratings before investing. AAA and AA-rated NCDs from established companies offer reasonable safety with higher returns than traditional FDs. |
Taxation: Understanding Your Net Returns
Both NCD and fixed deposit interest face taxation as “income from other sources” at your marginal tax rate. However, the tax implications differ based on structure and holding period.
Tax Calculation Example (30% Tax Bracket)
Fixed Deposit (₹2 lakh, 6.5%, 1 year):
- Gross interest: ₹13,000
- Tax liability: ₹3,900
- Net returns: ₹9,100 (4.55% effective rate)
NCD (₹2 lakh, 9%, 1 year):
- Gross interest: ₹18,000
- Tax liability: ₹5,400
- Net returns: ₹12,600 (6.3% effective rate)
The Airtel Finance fixed deposit interest rates remain competitive, while NCDs continue to offer an after-tax advantage.
TDS Implications
- FDs: 10% TDS when annual interest exceeds ₹40,000
- Listed NCDs: No TDS on interest payments
- Unlisted NCDs: TDS applicable based on issuer policies
Liquidity and Flexibility Features
A fixed deposit’s premature withdrawal typically incurs a penalty interest rate of 0.5-1% below the contracted rate. However, you retain access to your principal amount. Some banks offer loans against FD facilities, allowing you to access funds while maintaining the deposit.
Listed non-convertible debentures trade on stock exchanges, providing secondary market liquidity. You can sell your NCD holdings before maturity at prevailing market rates. However, bond prices fluctuate with changes in interest rates and credit perceptions.
Investment Suitability Matrix
Your choice between NCD vs fixed deposit depends on multiple personal factors:
Choose Fixed Deposits When:
- You prioritise capital preservation over returns.
- Your investment horizon is less than 2 years.
- You need guaranteed liquidity.
- You’re a first-time investor.
- You require DICGC insurance protection.
Choose NCDs When:
- You can accept moderate credit risk for higher returns.
- Your investment horizon exceeds 3 years.
- You want portfolio diversification.
- You’re comfortable with market price fluctuations.
- You seek inflation-beating returns.
Portfolio Allocation Strategy
Smart investors don’t view this as an either-or decision. Consider a balanced approach based on your risk tolerance
Conservative Allocation (Age 50+)
- 80% in Airtel Finance fixed deposit
- 20% in AAA-rated NCDs
Moderate Allocation (Age 30-50)
- 60% in fixed deposits
- 40% in AA+ or higher-rated NCDs
Aggressive Allocation (Age 25-35)
- 40% in fixed deposits
- 60% in diversified NCD portfolio
| Mistakes to Avoid: Never invest your entire emergency fund in NCDs. Maintain at least 6 months’ expenses in liquid FDs or savings accounts. |
The Verdict: Making Your Decision
The NCD vs fixed deposit debate doesn’t have a universal answer. Fixed deposits excel in safety, liquidity, and predictability, making them ideal for conservative investors and emergency funds. Non-convertible debentures offer superior returns and inflation protection but require credit risk assessment and longer investment horizons.
For most Indian investors, a combination approach works best. Use FDs for safety and short-term goals while allocating a portion to high-rated NCDs for enhanced returns. The Airtel Finance fixed deposit calculator can help you model different scenarios and make informed decisions based on your specific financial goals.
Consider starting with a small NCD allocation to understand the product dynamics before increasing exposure. Remember, successful investing involves balancing returns with your comfort level and financial objectives.
Frequently Asked Questions
Is NCD better than FD for long-term wealth creation?
NCDs typically offer 1-3% higher returns than fixed deposits, making them better for long-term wealth creation.
What is the disadvantage of NCD compared to fixed deposits?
The primary disadvantage of non-convertible debentures is credit risk: if the issuing company defaults, you may lose your investment.
Is NCD safe for conservative investors?
AAA and AA-rated NCDs from established companies are relatively safe but still carry a higher risk than bank fixed deposits. Conservative investors should limit NCD exposure to 20-30% of portfolios.
Is NCD interest taxable at the same rate as FD interest?
Yes, both NCD and fixed deposit interest are taxed as income from other sources at your marginal tax rate. However, the listed NCDs don’t attract TDS on interest payments.
What happens to NCD after maturity compared to FD auto-renewal?
NCDs typically mature and return principal plus interest without auto-renewal options. Fixed deposits often auto-renew at prevailing rates.
