The NCD Rush: Why a 10% Coupon Can Leave a Top-Bracket Investor With Less Than a 7.1% Tax-Free Account
Fixed Income · Corporate Debt · India · 2026
The NCD Rush: Why a 10% Coupon Can Leave a Top-Bracket Investor With Less Than a 7.1% Tax-Free Account
With the repo rate held at 5.25% for a fourth consecutive policy and bank deposit rates drifting down, Non-Convertible Debentures advertising 9 to 11% are drawing retail money. That spread over government paper is not a bonus. It is a price, and it is worth knowing what you are being paid to accept.
Somewhere between a bank fixed deposit paying around 6.5% and a public NCD issue advertising 10.5%, an ordinary saver has to make a judgement that professional credit analysts spend careers refining. The advertisement makes it look like a comparison of two numbers. It is not.
An NCD is not a deposit. It is a loan you are making to a company, and the higher rate exists because the market has decided that lending to that company carries risks that lending to the government does not. The useful question is never which issue pays the most. It is whether the extra percentage points are enough for what you are absorbing.
Quick Summary
NCD yields in 2026 run roughly 7.0% for AAA paper to 13% and above for BBB, against a 10-year government security yield near 6.9% and a repo rate of 5.25%. The gap is a credit spread, typically 1.5 to 3 percentage points depending on rating. Interest is taxed at your slab rate, which means a 10% NCD leaves a top-bracket investor with about 6.88% after tax, less than PPF pays tax-free.
What We Know: the rate backdrop driving this
The environment that makes NCD advertising work right now is a matter of record.
- The repo rate is 5.25%. The Monetary Policy Committee held it there at the August 2026 review, the fourth consecutive meeting without a change, retaining a neutral stance. The Standing Deposit Facility is at 5.00% and the Marginal Standing Facility and Bank Rate at 5.50%.
- Rates fell sharply before the pause. The RBI cut a cumulative 125 basis points during 2025, which is what pulled bank deposit rates down from where savers remember them.
- The risk-free benchmark sits near 6.9%. The 10-year government security yield is the reference against which every corporate coupon is priced, and corporate yields have not fallen as fast as government yields, leaving spreads wide.
- Issuance is at record levels. The Indian bond market recorded its highest-ever issuance of roughly ₹9.9 trillion in FY 2024-25, with NBFCs, housing finance and gold loan companies among the most active retail-facing issuers.
- The regulatory scaffolding has been tightened. SEBI consolidated its rules for debenture trustees into a single master circular in August 2025, covering due diligence on security creation, continuous monitoring of security cover and prompt disclosure to investors when cover falls short.
Reading the ladder: where every extra percentage point comes from
A coupon is not invented by a marketing department. It is assembled, layer by layer, from the policy rate upward, and each layer has a name.
Read that chart as a price list rather than a menu. Moving from AA to A adds roughly 175 basis points of income and moves you into a materially different pool of borrowers. The market is not being generous at the bottom of the ladder; it is quoting what it costs those issuers to raise money.
Coupon is a promise. Yield is what you actually earn.
The single most common error in retail bond investing is treating the coupon as the return. The coupon is a fixed rupee amount set against face value. What you earn depends on what you paid, how long is left, and what comes back at redemption.
| Price you pay | Annual coupon | Current yield | At redemption | Approximate yield to maturity |
|---|---|---|---|---|
| ₹900 | ₹100 | 11.11% | Gain of ₹100 | About 14.0% |
| ₹950 | ₹100 | 10.53% | Gain of ₹50 | About 12.0% |
| ₹1,000 | ₹100 | 10.00% | No gain or loss | About 10.0% |
| ₹1,050 | ₹100 | 9.52% | Loss of ₹50 | About 8.1% |
| ₹1,100 | ₹100 | 9.09% | Loss of ₹100 | About 6.3% |
The same bond, five different returns
Nothing in that table changes the issuer, the security or the coupon. Only the entry price moves, and the outcome swings from about 6.3% to about 14%. This is why a bond bought in the secondary market at a premium can quietly deliver less than a plain bank deposit, and why a NCD advertised as a 10% instrument may be nothing of the sort by the time you buy it.
A credit rating is a starting point, not a guarantee
A rating is a professional opinion about the likelihood of timely repayment, formed on a particular date with the information then available. It is genuinely useful, and it is genuinely not a warranty. Ratings are reviewed, downgraded and occasionally moved several notches in a single action when something breaks.
Beyond the letter, four things in the issuer’s own numbers do most of the explaining: leverage, profitability, liquidity and the refinancing wall. For an NBFC, that means the asset-liability profile, capital adequacy, the non-performing asset ratio and how much debt falls due in the next twelve months against what can realistically be raised.
Why “secured” is a description of a claim, not a promise of safety
A secured NCD carries a charge over specified assets, registered in favour of a debenture trustee who acts for all holders. Under the insolvency framework, secured creditors rank ahead of unsecured creditors and of corporate deposit holders. That ordering is real and it matters.
What it does not tell you is whether the collateral is worth what the certificate says, whether the cover ratio holds under stress, and how long enforcement would actually take. SEBI requires listed issuers to maintain a 100% asset cover or the cover specified in the offer document, certified by the statutory auditor and monitored by the trustee. In practice most secured issues run a cover of about 1.1 to 1.5 times.
Three questions the word “secured” does not answer
What is the collateral? A pool of gold loans behaves very differently in a default from a half-built property. What is the cover ratio, and is it computed on book value or market value? And who else has a charge on the same assets, on a pari passu or a subordinated basis? Recent Indian defaults in housing finance and infrastructure lending left retail debenture holders waiting years through insolvency proceedings and recovering well short of face value, despite holding paper described as secured at the time of issue.
Listed is not the same as liquid
Public NCD issues are listed on the exchanges, and the listing is often presented as an exit route. For most retail-sized holdings in most issues, it is a theoretical one. Corporate bond secondary trading in India is concentrated in a small number of large, highly rated lines. A mid-sized NBFC issue may trade in a handful of lots a week or not at all.
The consequence is practical. If you need the money before maturity, you may find no buyer at a fair price, and the only exit is a discount that wipes out a year or more of the extra yield you bought the paper for. Treat the maturity date as the real exit date and size the position accordingly.
Match the tenure to the money, not the yield to the mood
Money you might need inside three years does not belong in a seven-year NCD, regardless of the coupon. The emergency fund stays in a bank account or a liquid instrument. NCDs are for the portion of a portfolio that can genuinely sit undisturbed until redemption, which for most households is a minority of their fixed income, not the core of it.
The comparison almost nobody runs: what you keep after tax
NCD interest is taxable at your slab rate as income from other sources. That is the detail which decides whether the extra spread survives contact with reality, and it is why the headline comparison against a tax-free instrument is misleading.
The picture inverts at lower slabs. A retiree whose total income falls under the threshold that attracts no tax keeps the full 10%, and for that investor the spread is real money. Two features also work in the NCD’s favour on cash flow: listed NCDs held in demat form do not attract TDS on interest, and a listed NCD sold on the exchange after twelve months is taxed on the gain at the long-term capital gains rate rather than at slab.
Five questions to answer before you apply
- What does this company actually do, and how does it make the money to repay me? If the business model cannot be explained in two sentences, the credit cannot be assessed in an afternoon.
- What is the rating, who assigned it, and when was it last reviewed? Then go past the letter into leverage, profitability, liquidity and the next twelve months of maturities.
- If it is secured, secured on what, at what cover, and behind whom? Read the security description and the cover ratio in the offer document rather than the word on the cover page.
- How would I exit in year two if I had to? Check whether the issuer’s existing listed lines actually trade, and assume you cannot sell if they do not.
- Why is this issuer paying materially more than the government? Name the reason. If you cannot, you are not being compensated for a risk you understand, you are being paid to accept one you have not identified.
What Is Still Unclear
Three things cannot be pinned down, and they are exactly the things the marketing tends to imply are settled.
- Where rates go next. The MPC has held at 5.25% through four consecutive meetings with a neutral stance, and the next review is scheduled for early October 2026. A neutral stance is an explicit statement that the committee has not decided, so anyone telling you rates will definitely fall further is guessing.
- Whether today’s spreads are adequate compensation. Credit spreads of 1.5 to 3 percentage points are wide by recent standards, but whether they are sufficient depends on a default rate that has not happened yet. Historical default statistics describe past cohorts in past conditions.
- How a specific issue would behave in a stress event. Asset cover certified on book value at the last reporting date is not the same as recoverable value in an insolvency two years later, and no published figure closes that gap in advance.
A short discipline checklist
Frequently asked questions
What is an NCD and how is it different from a fixed deposit?
A Non-Convertible Debenture is a debt instrument issued by a company to raise money from investors, paying a fixed coupon and returning the principal at maturity, with no option to convert into equity. A bank fixed deposit is a deposit with a regulated bank, covered by deposit insurance up to ₹5 lakh per depositor per bank. An NCD carries no such cover: you are a lender to that company, and repayment depends entirely on the issuer’s financial condition.
Are NCDs safe if they are rated and secured?
Safer, not safe. A rating is an opinion at a point in time and can be downgraded. Security means a registered charge over specified assets held through a debenture trustee, which places you ahead of unsecured creditors in insolvency, but the recovery still depends on what the collateral is worth, what the cover ratio is and how long enforcement takes. Indian retail debenture holders in past defaults have waited years and recovered materially less than face value on paper that was described as secured.
Why do NCDs offer 10% when bank FDs offer around 7%?
Because the market prices credit risk. With the repo rate at 5.25% and the 10-year government security yield near 6.9%, anything paying meaningfully above that is being paid a credit spread, typically 1.5 to 3 percentage points depending on rating. That spread compensates for the possibility of default, for the difficulty of exiting before maturity, and for structural features of the specific instrument. It is a price for risk, not free extra income.
What is the difference between coupon and yield on an NCD?
The coupon is the fixed interest rate stated on the face value: a 10% coupon on ₹1,000 pays ₹100 a year regardless of what happens later. Yield is what you actually earn, and it depends on the price you paid, the time to maturity and the redemption amount. The same 10% coupon bond with three years left delivers roughly 14% if bought at ₹900 and roughly 6.3% if bought at ₹1,100.
How is NCD income taxed in India?
Interest is taxable at your slab rate as income from other sources. Listed NCDs held in demat form do not attract TDS on interest, which helps cash flow but does not reduce the tax due. If you sell a listed NCD on the exchange after holding it for more than twelve months, the gain is taxed as a long-term capital gain at the applicable rate rather than at slab. Confirm your own position with a tax adviser.
Can I sell an NCD before maturity?
In principle yes, since public issues are listed. In practice, listing does not create a market. Secondary trading in Indian corporate bonds is concentrated in large, highly rated lines, and a mid-sized issue may trade rarely or not at all. Selling in a thin market usually means accepting a discount that can erase more than a year of the extra yield, so the safer assumption is that you hold to maturity.
How much of my portfolio should be in NCDs?
There is no universal number, but the structure of the decision is consistent: NCDs sit around a core of sovereign-backed instruments rather than replacing it, exposure to any single issuer should be capped so that one default cannot damage the fixed income allocation, and nothing you might need before the maturity date belongs there at all. Anyone whose entire fixed income is in one high-yield issue has concentrated exactly the risk they were trying to avoid.
What is the minimum investment in a public NCD issue?
Typically ₹10,000, usually as ten debentures of ₹1,000 face value, applied for through a broker or an ASBA-based application in much the same way as an IPO. The low entry point is part of why these issues attract retail money, and it is also why position sizing and diversification deserve deliberate thought rather than the default of putting the whole allocation into whichever issue is currently open.
The short version
The spread is real, and so is the reason for it. With the repo rate at 5.25% and government paper near 6.9%, an NCD offering 10% is being paid roughly three percentage points for credit, liquidity and structural risk that a bank deposit does not carry. That can be an entirely sensible trade, particularly for an investor in a low tax bracket who can hold to maturity. It is a poor one for a top-bracket investor who has not run the post-tax number, since 10% taxable becomes 6.88% and a tax-free account paying 7.1% quietly wins. Read the coupon as a promise and the yield as an outcome, treat the rating as the beginning of the analysis rather than the end, check what “secured” is secured on, and assume you cannot sell early. In debt investing the object is to be repaid, and capital preservation belongs ahead of yield optimisation.
