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NCDs offer higher interest than FDs, and that extra yield has a reason: you are taking on corporate credit risk. The question is whether that extra 1–2% justifies the risk and complexity. For most people keeping money in the safe bucket of their portfolio, it does not. For people who understand what they are lending to and why, NCDs can occasionally make sense.
What you are actually doing with each instrument
When you open a bank Fixed Deposit, you are lending money to a bank regulated by the RBI. Your deposit up to ₹5 lakh per depositor per bank is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The bank is subject to capital adequacy norms, liquidity requirements, and regular audits. The safety is structural.
When you buy an NCD, a Non-Convertible Debenture, you are lending money directly to a company. The company promises to pay interest at fixed intervals and return your principal at maturity. There is no DICGC insurance. There is no central bank backstop. If the company runs into financial trouble, your recovery depends on the company’s assets, your position in the creditor hierarchy, and the legal process.
This is not a theoretical concern. Companies with AAA ratings have defaulted. IL&FS held top credit ratings from reputable agencies right up until its default cascade in 2018 froze the NBFC credit market. Ratings are opinions, not guarantees.
The yield difference
In a normal interest rate environment, AAA-rated NCDs from large NBFCs tend to offer 0.5–1.5% more than comparable-tenor FDs from the same quality tier of banks. Lower-rated NCDs, AA, A, and below, offer more, but the credit risk increases meaningfully at each step down.
On ₹10 lakh invested for 3 years, a 1% yield difference is ₹10,000 per year. Over 3 years, roughly ₹30,000 in additional pre-tax income. After tax at the 30% slab, that is ₹21,000. Is that enough to justify the complexity and the credit risk? That is the honest question you need to ask yourself.
Secured vs unsecured NCDs
Not all NCDs are the same even within the same company. Secured NCDs are backed by a charge on the company’s specific assets, property, receivables, or other collateral. If the company defaults, these assets can be liquidated to repay secured debenture holders.
Unsecured NCDs have no such backing. They are just a promise to pay. In liquidation, they rank below secured creditors, secured debenture holders, banks, and sometimes even other creditors. They are last in line. The yield on unsecured NCDs is typically higher than secured NCDs from the same issuer, and for good reason.
If you are investing in NCDs, prefer secured over unsecured, especially in the current environment where several NBFCs have faced stress.
Tax treatment
Both FDs and NCDs are taxed identically on the interest income. The interest is added to your income and taxed at your slab rate. Banks deduct TDS at 10% if interest exceeds ₹40,000 in a year (₹50,000 for senior citizens). Listed NCDs also have TDS on interest at 10%.
If you sell an NCD before maturity on the exchange, the capital gain is taxed as STCG (at slab rate, if held under 12 months) or LTCG at 20% with indexation (if held more than 12 months). FDs broken early attract a penalty, not capital gains, a different but often equally unattractive outcome.
There is no fundamental tax advantage to NCDs over FDs for most people. The idea that NCDs are tax-efficient is largely a myth for retail investors investing through public issues.
Liquidity comparison
FDs can be broken early at most banks with a small penalty, typically a 0.5–1% reduction in the applicable interest rate. It is predictable and fast. You request early closure, bank processes it in a day or two.
Listed NCDs can theoretically be sold on BSE or NSE. But secondary market liquidity for retail NCD investors is inconsistent at best. Some well-known NBFC debentures have decent trading volumes. Many smaller issuers’ NCDs barely trade. You may find yourself holding to maturity whether you want to or not, because the price you would get on the secondary market is punishing.
Unlisted NCDs (which exist, particularly in private placements) have no liquidity mechanism at all before maturity. For retail investors, unlisted NCDs are a particularly bad idea.
When NCDs make sense
NCDs are not universally bad. There are situations where the yield premium meaningfully compensates for the credit risk and you can evaluate the underlying issuer. Those situations are:
You understand the issuing company, their business model, balance sheet, asset quality (for NBFCs), and why their credit rating is where it is. This is not something most retail investors do before buying an NCD, but it is what you should do.
The issuer is a large, systemically important entity, a top-tier NBFC, an infrastructure finance company, a large housing finance company with a clear and auditable loan book. Not a mid-size developer raising money to complete a project that has already been delayed twice.
You are investing a small fraction of your total portfolio. NCDs should not be how you hold your emergency fund or your near-term goal money. They belong in the satellite portion of a fixed income allocation, not the core.
The yield premium after accounting for taxes and credit risk still leaves you ahead of a comparable bank FD or a G-Sec. Sometimes the math works out. Sometimes it does not. Running the numbers honestly is how you decide.
My honest view
For most people building the safe bucket of their portfolio, the money that needs to be there when they need it, FDs from reputable banks or government instruments (G-Secs, T-bills) are the right tool. The yield you sacrifice compared to NCDs is the price of certainty, and for genuinely safe money, certainty is worth paying for.
NCDs belong in the conversation only when the investor has done the credit work, understands the issuer, and is comfortable with the liquidity profile. That is a relatively small subset of retail investors. The rest are better served by keeping safe money safe and chasing returns through equity for the long-term portion of their portfolio, where the compounding math actually works in your favour. I write more about that framework in my post on building long-term wealth.
The fixed income space has no free lunch. Extra yield always means extra risk or extra illiquidity or both. Anyone marketing an NCD as both high-yield and completely safe is not being straight with you. I also explore the psychology of chasing returns, which is often what drives people toward NCDs in the first place.
Frequently asked questions
Are NCDs safer than FDs? No. FDs from scheduled banks have DICGC insurance up to ₹5 lakh. NCDs carry corporate credit risk. A AAA-rated NCD from a large NBFC is relatively safe, but not as safe as a bank FD or government instrument.
Is NCD interest taxable? Yes, fully taxable at your income slab rate, exactly like FD interest.
Can I exit an NCD before maturity? Listed NCDs can be sold on the exchange, but secondary market liquidity is variable. FDs allow early closure with a predictable penalty.
What is the difference between secured and unsecured NCDs? Secured NCDs are backed by specific company assets. Unsecured NCDs rank below secured creditors in a default, higher risk, typically higher yield.
For safe money, your emergency fund, near-term goals, capital you cannot afford to lose, use FDs or government bonds; NCDs belong only in the satellite allocation where you have done the credit homework and the yield genuinely compensates for the risk you are taking.
This post is for educational purposes only. It is not financial advice. Mohit Mehra is not a SEBI registered investment advisor. Please consult a qualified financial advisor before making investment decisions.