Fixed Deposit (FD) versus Non-convertible debentures (NCDs): 4 key points of differences

Both fixed deposits and non-convertible debentures are added by investors in their portfolio for decent returns over time. Here below in the article, we will discuss the key points- where and in what ways the two financial instruments differ.

First and foremost, while fixed deposits are fixed-income instruments that bear interest return at the end of the term, non-convertible debentures are generally issued by corporates for raising funds. And in return, they pay an interest rate that can be paid back based on the frequency of interest payments.

Now, below are the key points of difference between the two:

FDs are deemed more secure: Fixed deposits being issued by RBI-regulated banks are deemed safer when compared to bonds. Nonetheless, NCDs are also rated denoting their safety by the different rating agencies.

NCDs also carry credit risk i.e. there can be chances of default on principal and interest payment by the issuers of these bonds.

Return from FDs is relatively less: As these NCDs are to some extent riskier, they come with the advantage of a higher interest rate than bank FDs. Banks in India currently offer an interest rate of 2.5-8%, depending on the tenure, which ranges from a few days to some years.

Usually, return on NCD is 1-2% higher than most FDs of a similar tenure.

Taxation of FDs and NCDs: Both the instruments are taxed as per the investor’s slab rate under the head ‘income from other sources’. On interest on FD income, TDS is payable, whereas in the case of listed NCDs, there are no TDS implications.

Liquidity: While early redemption or premature withdrawal is allowed in the FDs, with a cost, NCDs are difficult to exit. This is as though trading is available in them, and volume is relatively low.

What to choose? FD or NCD

Investors should always base their investment choices on their own financial goals as well as risk tolerance. If you can afford a higher credit risk for a higher interest rate or return, you can definitely opt for NCDs.