Can I lose money on a non-convertible debenture?

Yes. While NCDs offer fixed interest, they carry credit risk. If the issuing company defaults, especially on unsecured NCDs, investors may not recover their full principal.

Is TDS still deducted on NCD interest if I hold it in Demat form?

Yes. Since the Finance Act, 2023 removed the earlier exemption, TDS at 10% (or 20% without a valid PAN) now applies to listed NCD interest even when held in Demat form, if the interest exceeds the prescribed annual threshold.

Does converting a convertible debenture into shares trigger capital gains tax?

No. Conversion is specifically excluded from the definition of “transfer” under Section 47(x) of the Income Tax Act, so no capital gains tax arises at the moment of conversion. Tax applies later when the resulting shares are eventually sold.

How is the holding period calculated for shares received after conversion?

The holding period is counted from the original date the debenture was allotted, not from the date of conversion, which can help investors qualify for long-term capital gains treatment sooner on the resulting shares.

Are all NCDs secured?

No. NCDs can be secured (backed by company assets) or unsecured. Secured NCDs are considered lower risk but usually offer a lower coupon than unsecured NCDs.

Do I need a credit rating check before investing in an NCD?

SEBI mandates that public NCD issues carry a credit rating from a registered rating agency. Ratings in the AAA or AA categories indicate lower default risk compared to lower-rated issuances.

What is the role of a debenture trustee?

A SEBI-registered debenture trustee is appointed to monitor the issuer’s compliance with the debenture’s terms, oversee asset cover for secured NCDs, and act on behalf of debenture holders if the issuer defaults.

Which is better for a retiree seeking regular income: convertible or non-convertible debentures?

Non-convertible debentures offer predictable, fixed payouts suitable for regular income, whereas convertible debentures introduce equity market fluctuations that may not fit a low-risk profile.

Difference Between Convertible & Non-Convertible Debentures

Convertible vs Non-Convertible Debentures: Which Fixed-Income Instrument Fits Your Portfolio?

6 min read•Updated on 12th Sept, 2026•by Team Angel One

Debentures are fixed-income instruments issued by corporations to raise capital. They are broadly categorized into Convertible Debentures (CDs), which can convert into equity shares over time, and Non-Convertible Debentures (NCDs), which remain strictly debt instruments offering higher regular interest payouts.

This article breaks down the differences between convertible debentures and non-convertible debentures (NCDs) and how each is structured.

Key Takeaways

Convertible debentures can be converted into the issuing company’s equity shares after a specified period, while non-convertible debentures (NCDs) remain debt instruments until maturity and are never converted.
NCDs offer higher fixed interest rates than convertible debentures, compensating investors for giving up the potential upside of equity conversion.
Secured NCDs, backed by the issuer’s assets, carry lower risk than unsecured NCDs, which rely solely on the company’s creditworthiness.

In India, both instrument types fall under SEBI’s Issue and Listing of Non-Convertible Securities (ILNCS) Regulations, 2021, and convertible securities also draw on SEBI’s ICDR framework for the equity-conversion component.

Tax treatment differs meaningfully: NCD interest is taxed as regular income with TDS now applicable even on Demat-held listed NCDs, while converting a convertible debenture into shares is not treated as a taxable transfer at the time of conversion.

What is a Debenture?

A debenture is a debt instrument issued by a company to raise capital from investors, promising a fixed interest rate (coupon) over a defined tenure, with the principal repaid at maturity. Debentures are unsecured by default under the Companies Act framework. Issuers frequently choose to back them with specific assets to reassure investors, at which point the “secured” classification applies.

What are Convertible Debentures (CDs)?

Convertible debentures act as hybrid financial instruments. They begin their lifecycle as standard debt, paying regular interest to the holder. After a predetermined date or milestone, the investor has the right, or is obligated, to convert those debentures into a fixed number of the company's equity shares.

Fully Convertible Debentures (FCDs): The entire face value is automatically converted into equity shares upon maturity.
Partly Convertible Debentures (PCDs): Only a portion of the debenture converts to equity, while the remainder stays as a fixed-income debt instrument.

Also Read About: Why Do Companies Issue Convertible Debentures?

What are Non-Convertible Debentures (NCDs)?

NCDs cannot be converted into stock. That’s because investors give up any claim to future equity upside; issuing companies sweeten the deal by offering significantly higher coupon rates compared to standard bank fixed deposits or convertible instruments.

Secured NCDs: Backed by the company's tangible assets (like machinery, real estate, or receivables). If the company is in financial distress, these assets are liquidated to repay investors first.
Unsecured NCDs: Not backed by physical collateral, carrying a higher risk profile and therefore offering even higher interest rates to offset that risk.

Example of NCD Coupon Rate vs. Effective Yield

Scenario: If an NCD with a face value of ₹1,000 offers an 8% annual coupon, the investor receives ₹80 in cash interest per year regardless of the market price.

Yield Calculation: If that same NCD is purchased at a discounted market price of ₹950 on the secondary exchange, the effective yield increases to 8.42% (calculated as ₹80 ÷ ₹950), providing a higher return for investors buying below par.

The Difference Between Convertible and Non-Convertible Debentures

Feature	Convertible Debenture	Non-Convertible Debenture (NCD)
Conversion into equity	Yes, after a specified period or event, as per the offer terms	No, remains a debt instrument until maturity
Interest rate	Lower, since conversion optionality adds value	Higher, to compensate for no conversion upside
Investor profile	Growth-oriented investors seeking some equity upside with downside protection	Income-focused investors prioritising stable, predictable returns
Impact on company’s equity base	Dilutes existing shareholders upon conversion	No dilution. Remains a balance-sheet liability until repaid
Risk-return profile	Lower fixed income, potential capital appreciation if the stock performs well	Fixed, higher income, but no equity-linked upside

Types of Convertible Debentures

Type	Description
Fully Convertible Debenture (FCD)	The entire debenture amount is converted into equity shares as per the pre-agreed terms
Partly Convertible Debenture (PCD)	Only a portion of the debenture converts into equity, while the remainder is redeemed as debt
Optionally Convertible Debenture (OCD)	The investor has the choice, not the obligation, to convert into equity within a specified window

Types of Non-Convertible Debentures

Type	Description
Secured NCD	Backed by the issuer’s assets or collateral, offering recourse if the company defaults
Unsecured NCD	Not backed by specific assets. Investors rely solely on the issuer’s creditworthiness, and earn a higher coupon for this added risk
Redeemable NCD	Repaid in full at a specified maturity date (the vast majority of listed NCDs fall into this category)

How Conversion Works: A Simple Illustration

Number of Shares on Conversion = Debenture Face Value ÷ Conversion Price

Example: An investor holds a fully convertible debenture with a face value of ₹1,000, and the terms specify a conversion price of ₹100 per share.

Number of Shares = ₹1,000 ÷ ₹100 = 10 equity shares

If the company’s share price rises well above the conversion price by the conversion date, the investor benefits from the equity upside. If the share price falls below it, the investor still receives shares on the pre-agreed terms, which may be less attractive than simply holding an NCD to maturity.

Risk and Return: A Side-by-Side View

Factor	Convertible Debenture	Non-Convertible Debenture
Credit risk	Present, though partially offset by equity upside potential	Present. Central to evaluating any NCD, mitigated by secured structures
Interest rate risk	Lower impact, since equity potential can offset rate movements	More directly affected by prevailing interest rate changes
Liquidity	Depends on listing status and trading volumes	Depends on listing status. Many retail NCDs are listed on NSE/BSE debt segments
Credit rating relevance	Still relevant, but equity upside is a key consideration too	Central factor — always check the rating from CRISIL, ICRA, or CARE before investing

SEBI’s Regulatory Framework for Convertible and Non-convertible Debentures

Both convertible and non-convertible debentures are governed primarily by the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (ILNCS Regulations), which consolidated and replaced the earlier separate regulations for non-convertible debentures and securitized debt instruments.

Key Regulatory Points Include:

Mandatory credit rating: Public issues of NCDs require a credit rating from a SEBI-registered rating agency, which must be disclosed in the offer document.
Disclosure requirements: Issuers must disclose the terms of conversion (for convertible debentures), security details (for secured NCDs), and use of proceeds in the prospectus.
Debenture trustee requirement: A SEBI-registered debenture trustee must be appointed to safeguard investor interests and monitor compliance with the terms of the issue, particularly asset cover for secured NCDs.
Convertible securities and ICDR overlap: Because the equity-conversion component effectively becomes a share issuance, convertible debentures also draw on provisions under SEBI’s ICDR Regulations governing the pricing and disclosure of the equity to be issued on conversion.

Tax Treatment for Convertible and Non-convertible Debentures

Tax treatment differs at two stages: while the interest income is being earned, and when the instrument is sold, redeemed, or converted.

Aspect	Non-Convertible Debentures	Convertible Debentures
Interest income	Taxed as “Income from Other Sources” at the investor’s applicable slab rate	Same treatment on the interest portion earned before conversion
TDS on interest	10% TDS under Section 193 if interest exceeds ₹10,000 in a financial year — this now applies even to listed NCDs held in Demat form, following the removal of the earlier exemption by the Finance Act, 2023. 20% TDS if PAN is not furnished	Same TDS rule applies to the interest-paying period before conversion
Sale before maturity (STCG)	Held 12 months or less: gains taxed at the investor’s slab rate	Same rule applies if the debenture (before conversion) is sold within 12 months
Sale before maturity (LTCG)	Held over 12 months: taxed at 12.5% without indexation	Same rule applies if the debenture is sold, rather than converted, after 12 months
Conversion into equity	Not applicable	Conversion itself is not treated as a “transfer” under Section 47(x) of the Income Tax Act, so no capital gains tax arises at the point of conversion
Holding period after conversion	Not applicable	The holding period for the resulting equity shares is computed from the original date of debenture allotment, not the conversion date, which matters for determining later STCG/LTCG treatment on the shares
TDS relief	Can be avoided by submitting Form 15G/15H if eligible, or claimed as a credit while filing ITR	Same relief options apply on the debenture’s interest component

Example of TDS Threshold Calculation

Scenario: If you earn ₹12,000 in total interest across a financial year from a listed NCD held in your Demat account, you have crossed the statutory ₹10,000 threshold set under Section 193 of the Income Tax Act.

Tax Deduction: The issuer or intermediary will deduct a 10% TDS (₹1,200) on the entire ₹12,000 payout (or on the amount exceeding the limit depending on current operational interpretations, though typically triggered once the aggregate interest crosses the limit), which can later be claimed as a tax credit when filing your Income Tax Return (ITR).

Conclusion

The choice between a convertible and a non-convertible debenture ultimately comes down to what an investor values more: the predictability of a fixed return, or the possibility of participating in a company’s equity growth later. NCDs suit investors who want stable, contractually fixed income and are comfortable evaluating credit risk directly. In contrast, convertible debentures suit those willing to accept a lower initial yield for the option of upside if the issuer’s stock performs well.