Taxation of Non-Convertible Debentures (NCDs) in India – Investor & Issuer Guide 2025
Non-Convertible Debentures (NCDs) have emerged as a popular fixed-income investment instrument for individuals and institutions alike. While they offer predictable returns, it's crucial to understand the tax implications—both for investors earning income from NCDs and for companies issuing them. With increasing regulatory scrutiny and a shift towards transparent digital compliance, this blog dives into the tax treatment of NCDs under Indian tax laws and relevant provisions of the Income Tax Act, 1961.
WHAT ARE NON-CONVERTIBLE DEBENTURES (NCDS)?
NCDs are debt instruments issued by companies to raise capital. They function like loans where the investor is a lender, and the issuing company is a borrower.
Key features are:
1. Non-convertible: They cannot be converted into equity shares, unlike convertible debentures.
2. Tenure & Interest: Issued for a fixed period and pay periodic interest. (are repaid at maturity along with interest)
3. Secured vs Unsecured:
- Secured NCDs are backed by the company’s assets as collateral.
- Unsecured NCDs have no such backing and hence carry more risk.
4. Listing status:
- Listed NCDs are traded on stock exchanges, enhancing liquidity
- Unlisted NCDs are privately placed and not easily tradable.
5. Eligibility: Can be issued to both residents and non-residents, with tax implications varying accordingly.
RELATED PROVISIONS
Section 56(2): Covers ‘Income from Other Sources’, which includes any income not specifically exempted or covered under other heads of income.
Section 193: Deals with tax deduction at source (TDS) on interest on securities, such as bonds and debentures issued by companies or government entities.
Section 194A: Pertains to TDS on interest other than “interest on securities”, including interest from bank deposits, loans, or fixed deposits.
Section 112: Governs the taxation of Long-Term Capital Gains (LTCG) on both listed and unlisted securities, outlining the applicable tax rates and exemptions.
Section 2(42A): Short-term and long-term capital assets, determining the holding period criteria for classifying capital gains.
Section 48: Provides the method for computing capital gains, including deductions for expenses related to the transfer and indexation benefits for long-term assets.
TAXATION FOR INVESTORS
INTEREST INCOME ON NCDS
Interest received on NCDs is not exempt and is taxable as Income from Other Sources under Section 56(2) of the Income Tax Act. This income gets added to the total income and is taxed based on the individual’s income tax slab.
Example: If an investor earns ₹50,000 in interest from NCDs and falls in the 30% tax bracket, the entire ₹50,000 will be taxed at 30%.
TDS (TAX DEDUCTED AT SOURCE)
- Listed NCDs:
As per the Finance Act of 2025, if interest on securities/ debentures exceed ₹10,000 in a financial year, the company must deduct TDS at 10% as mandated under Section 193.
- Unlisted NCDs:
Section 194A provides for ‘Interest (Other than interest on securities) which includes interest on unlisted debentures. It mandates that TDS at the rate of 10% is to be deducted where the interest received in a financial year exceeds ₹10,000.
NOTE:
- TDS is applicable at normal rate when valid and operative PAN is provided. In case of No PAN/ Inoperable PAN, TDS is deducted at a higher rate of 20%
- TDS can be avoided by submitting Form 15G/15H, if eligible.
- Non-residents are taxed under Section 195, and DTAA provisions may offer relief (Understanding Form 15CA,CB & CC and DTAA Relief)
CAPITAL GAINS ON SALE OR REDEMPTION
When an investor sells an NCD before maturity or when it is redeemed by the issuer, capital gains may arise depending on the holding period.
WHAT ARE NON-CONVERTIBLE DEBENTURES (NCDS)?
NCDs are debt instruments issued by companies to raise capital. They function like loans where the investor is a lender, and the issuing company is a borrower.
Key features are:
3. Secured vs Unsecured:
- Secured NCDs are backed by the company’s assets as collateral.
- Unsecured NCDs have no such backing and hence carry more risk.
4. Listing status:
- Listed NCDs are traded on stock exchanges, enhancing liquidity
- Unlisted NCDs are privately placed and not easily tradable.
5. Eligibility: Can be issued to both residents and non-residents, with tax implications varying accordingly.
RELATED PROVISIONS
Section 56(2): Covers ‘Income from Other Sources’, which includes any income not specifically exempted or covered under other heads of income.
Section 193: Deals with tax deduction at source (TDS) on interest on securities, such as bonds and debentures issued by companies or government entities.
Section 194A: Pertains to TDS on interest other than “interest on securities”, including interest from bank deposits, loans, or fixed deposits.
Section 193: Deals with tax deduction at source (TDS) on interest on securities, such as bonds and debentures issued by companies or government entities.
Section 194A: Pertains to TDS on interest other than “interest on securities”, including interest from bank deposits, loans, or fixed deposits.
Section 112: Governs the taxation of Long-Term Capital Gains (LTCG) on both listed and unlisted securities, outlining the applicable tax rates and exemptions.
Section 2(42A): Short-term and long-term capital assets, determining the holding period criteria for classifying capital gains.
Section 48: Provides the method for computing capital gains, including deductions for expenses related to the transfer and indexation benefits for long-term assets.
Section 2(42A): Short-term and long-term capital assets, determining the holding period criteria for classifying capital gains.
Section 48: Provides the method for computing capital gains, including deductions for expenses related to the transfer and indexation benefits for long-term assets.
Example: If an investor earns ₹50,000 in interest from NCDs and falls in the 30% tax bracket, the entire ₹50,000 will be taxed at 30%.
TDS (TAX DEDUCTED AT SOURCE)
- Listed NCDs:
As per the Finance Act of 2025, if interest on securities/ debentures exceed ₹10,000 in a financial year, the company must deduct TDS at 10% as mandated under Section 193.
- Unlisted NCDs:
Section 194A provides for ‘Interest (Other than interest on securities) which includes interest on unlisted debentures. It mandates that TDS at the rate of 10% is to be deducted where the interest received in a financial year exceeds ₹10,000.
NOTE:
- TDS is applicable at normal rate when valid and operative PAN is provided. In case of No PAN/ Inoperable PAN, TDS is deducted at a higher rate of 20%
- TDS can be avoided by submitting Form 15G/15H, if eligible.
- Non-residents are taxed under Section 195, and DTAA provisions may offer relief (Understanding Form 15CA,CB & CC and DTAA Relief)
When an investor sells an NCD before maturity or when it is redeemed by the issuer, capital gains may arise depending on the holding period.
| TYPE | HOLDING PERIOD | LTCG/STCG RULES | TAX RATE |
| Listed NCDs | > 12 months | LTCG under Section 112 | 12.5% + Surcharge + Cess @4 % |
| | ≤ 12 months | STCG | As per slab rate |
| Unlisted NCDs | >36 months | LTCG under Section 112 | 12.5% + Surcharge + Cess @4 % |
| ≤36 months | STCG | As per slab rate |
• Redemption by issuer also leads to capital gain/loss.
TAXATION FOR ISSUING COMPANIES
When companies issue Non-Convertible Debentures (NCDs), there are several tax implications and compliance requirements they must address. Below is a breakdown of the key taxation aspects for issuing entities:
1. INTEREST PAYMENT AND DEDUCTIBILITY
Interest paid on NCDs is generally treated as a revenue expenditure and can be claimed as a deduction under Section 36(1)(iii) of the Income Tax Act, provided the borrowed funds are used for business purposes.
1. INTEREST PAYMENT AND DEDUCTIBILITY
Interest paid on NCDs is generally treated as a revenue expenditure and can be claimed as a deduction under Section 36(1)(iii) of the Income Tax Act, provided the borrowed funds are used for business purposes.
Key points include:
- The deduction is available on an accrual basis, meaning it can be claimed even if the interest is not yet paid, unless disallowed by specific provisions.
- If the NCDs are used for non-business purposes (e.g., personal use by promoters), the deduction may be denied.
- Companies should ensure proper documentation linking NCD proceeds to business use.
Issuers are required to deduct tax at source (TDS) on interest payments to NCD holders. The applicable sections are:
- Section 193: For interest paid on listed NCDs, where TDS is applicable unless exempted.
- Section 194A: Applies to unlisted debentures. TDS must be deducted if the interest exceeds prescribed thresholds (e.g., ₹10,000 for individuals).
- Section 195: For non-resident investors, TDS must be deducted at applicable rates under the Income Tax Act or as per the Double Taxation Avoidance Agreement (DTAA), whichever is beneficial.
Timely deduction and deposit of TDS are essential to avoid interest, penalties, and disallowances.
3. DISALLOWANCE PROVISIONS
Failure to comply with TDS requirements can lead to disallowance of expenses and additional tax burden:
Proper accounting and statutory reporting are critical for regulatory compliance:
Failure to comply with TDS requirements can lead to disallowance of expenses and additional tax burden:
- Section 40(a)(ia): If TDS is not deducted or not deposited by the due date, 30% of the interest expense will be disallowed in the year of accrual. It may be allowed in subsequent years upon compliance.
- Section 43B: Interest expenses are allowed only on actual payment. If the interest due is unpaid at year-end and not paid within the prescribed time, deduction will be deferred.
Proper accounting and statutory reporting are critical for regulatory compliance:
- Companies must file Form 26Q (TDS return) for reporting TDS on interest paid to residents.
- Interest payable and outstanding NCDs must be disclosed in the audited financial statements in line with the Companies Act, 2013 and Schedule III.
- Any deviation from disclosure requirements may trigger audit qualifications or penalties.
TAX PLANNING TIPS
Effective tax planning can benefit both investors and issuing companies in the NCD space:
FOR INVESTORS:
- Invest in listed NCDs and hold them for more than 12 months to avail the benefit of long-term capital gains (LTCG) taxation at concessional rates under Section 112.
- Submit Form 15G/15H (where eligible) to avoid TDS on interest if total income is below the taxable limit.
- Maintain detailed records of purchase price, sale value, and interest receipts for accurate income tax return filing and capital gains computation.
FOR COMPANIES:
- Ensure timely TDS deduction and deposit to avoid disallowances and interest/penalty proceedings.
- Classify interest expenses properly in the tax audit report (Form 3CD) and ensure reconciliation with books.
- Adhere to RBI, SEBI, and Companies Act regulations related to issuance, redemption, and disclosure of NCDs.
RECENT DEVELOPMENTS FOR F.Y 2025-26 OUTLOOK
The regulatory and tax environment for NCDs continues to evolve. Key developments to watch:
- The Finance Act, 2025 proposes measures to harmonize tax treatment between listed and unlisted debt instruments, promoting uniformity and investor confidence.
- The government is promoting digitization and integration through MCA21 V3 and the Income Tax Portal, streamlining compliance and verification of TDS credits.
- Rising investor participation in NCDs has prompted SEBI to tighten disclosure requirements under its NCS (Non-Convertible Securities) Regulations, enhancing transparency and investor protection.
CONCLUSION
Non-Convertible Debentures can be a tax-efficient investment avenue—if planned and reported correctly. For investors, it’s essential to distinguish between interest income and capital gains, while for companies, TDS and disclosure compliance are key to avoiding tax litigation.
Whether you’re looking to invest in NCDs or issue them as a corporate borrowing strategy, TaxOSmart can assist with:
- NCD tax planning and reporting
- TDS and ITR filing
- Corporate structuring and compliance
DISCLAIMER
The information contained in this document is prepared by R.J. Soni & Associates and TaxOSmart LLP (hereinafter referred to as RJSA) for information purpose only. It does not constitute any legal advice or tax advice. In no way, this document should be treated as a marketing material or efforts to solicit a client. While we have made every attempt to ensure that the information contained in this document is true, RJSA, its partners and/or any of its employees make no claims / guarantee about its accuracy, completeness, or up-to-date character, or warranty, express or implied, including the warranty of opinions expressed for a particular purpose, or assume any liability or responsibility for the accuracy, completeness, or usefulness of any information available from this document.
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