What is the difference between a fixed deposit and a Non Convertible Debenture or NCD?

Both a fixed deposit and a non convertible debenture are debt instruments. They offer fixed interest rates, which are offered either in a cumulative manner or at regular intervals.

Here are 6 differences between a fixed deposit and a non convertible debenture.

a) Tax On Interest Rates

Both the instruments have a tax that would be deducted. But, there is no TDS on NCDs at the moment, while fixed deposits have a TDS depending on the nature of the deposit. If it is a company fixed deposit, there is a TDS of interest income if the same exceeds Rs 5000 for the financial year.

On the other hand a bank deposit attracts a TDS if the interest income crosses Rs 10,000 during the course of the year.

b) Listing on The Stock Exchanges

NCDs are listed on the stock exchanges, while fixed deposits are not. However, non convertible debentures tend to have poor liquidity. You cannot sell large quantities through the exchanges.

c) NCDs Can Be Converted Into Equities

Earlier, we had full convertible debentures, which could be converted to equity shares. These days we do not see any fully convertible debentures. There's no question of fixed deposits getting listed on the exchanges.

d) Interest Rate Risk

If interest rates rise, non convertible debentures may see a drop in their prices on the exchanges. On the other hand if interest rates drop, prices of them could rise. There is virtually no risk of this as far as fixed deposits are concerned.

e) NCDs Could be a Little More Riskier

There are some NCDs that are not secure, which could be risky in terms of payment of interest and capital. On the other hand there are many NCDs that are secure.

In terms of deposits, it would depend on the type of deposit - whether company deposit or a bank deposit. Company deposits are not very secure, while bank deposits are secure to the extent of Rs 1 lakh. However, fundamentally, it maybe Rs 1 lakh, but reputed bank deposits and those from the government banks, can very rarely default in payment of interest and principal amount.

f) Ability to Sell

Deposits can be considered as more liquid. For example, in case of a bank deposit, you can easily redeem them at the bank. In the case of NCDs, you may not be able to sell large quantities at the exchange. You would have to wait for the tenure to expire and then surrender the same to the company for redemption.

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