Short answer: A convertible debenture is a loan you give a company that can later be turned into its shares, so it usually pays a lower coupon but offers equity upside. A non-convertible debenture (NCD) stays a debt instrument till maturity: you get fixed interest and your principal back, with no conversion. NCDs suit income-seekers who can judge credit risk; convertibles suit investors comfortable with share-price risk.
Last updated: 13 October 2026.
What is a debenture?
A debenture is a debt security. When you buy one, you lend money to the issuing company for a fixed period. In return the company promises to pay interest (the coupon) at set intervals and repay the face value on the maturity date. Unlike a bank fixed deposit, a debenture is not covered by deposit insurance, and your safety depends on the issuer’s ability to pay.
Debentures can be secured (backed by a charge on the company’s assets) or unsecured (backed only by the issuer’s promise). They can be listed on NSE or BSE, which allows trading before maturity, or privately placed and unlisted. Listed debt securities are regulated by the Securities and Exchange Board of India (SEBI), and public issues must carry a credit rating.
Convertible debentures explained
A convertible debenture gives the holder, or sometimes the company, the right to convert all or part of the debenture into equity shares at a pre-agreed ratio or price, on or after a set date. Until conversion, it behaves like a bond and pays interest.
- Fully convertible debentures (FCDs): the entire face value converts into shares. Interest is paid only until conversion.
- Partly convertible debentures (PCDs): one part converts into shares and the rest stays as debt and is redeemed in cash at maturity.
- Optionally convertible debentures (OCDs): the holder chooses whether to convert. If not converted, the debenture is redeemed like normal debt.
Because investors get a possible share in the company’s growth, issuers can pay a lower coupon. Startups and growth companies often use convertibles in private funding rounds. For retail investors in India, listed convertible issues are now uncommon; most retail debt offerings are NCDs.
Non-convertible debentures (NCDs) explained
An NCD can never become equity. You receive the coupon, monthly, quarterly, annually or cumulatively at maturity, and the face value at redemption. Since there is no equity upside, issuers usually pay a higher coupon than they would on a convertible or than a bank pays on a deposit of similar tenure.
Retail investors mostly meet NCDs through public issues by NBFCs, housing finance companies and corporates, and through the secondary market on the exchanges. SEBI-registered online bond platforms also sell listed NCDs in small lots. Before investing in an NBFC’s NCD, you can check that the issuer appears in the RBI-registered NBFC list.
Convertible vs non-convertible debentures: side by side
| Feature | Convertible debenture | Non-convertible debenture |
|---|---|---|
| Can become shares? | Yes, fully, partly or at holder’s option | No, remains debt till maturity |
| Typical coupon | Lower | Higher, to compensate for no upside |
| Return drivers | Interest plus possible gain from share price | Interest plus any change in market price if listed |
| Main risks | Share price falling below conversion value; issuer default before conversion | Issuer default; interest-rate and liquidity risk |
| What you hold at maturity | Shares (for the converted part) or cash | Cash equal to face value (plus final interest) |
| Who usually issues to retail | Rare in public issues today; common in private rounds | NBFCs, HFCs and corporates via public issues |
| Suits | Investors who want equity exposure with some income | Investors who want predictable income |
Worked example: ₹1,00,000 in each
Suppose you invest ₹1,00,000 in a 3-year NCD paying 9.5% a year, annual payout, and ₹1,00,000 in a 3-year fully convertible debenture paying 6% a year that converts into 1,000 shares (a conversion price of ₹100 a share) at the end of year 3. These numbers are illustrative only.
| Scenario | NCD (9.5%) | Convertible (6% + 1,000 shares) |
|---|---|---|
| Interest over 3 years | ₹28,500 | ₹18,000 |
| Share price at conversion ₹140 | Gets ₹1,00,000 back | Shares worth ₹1,40,000 |
| Total value if share price is ₹140 | ₹1,28,500 | ₹1,58,000 |
| Total value if share price is ₹70 | ₹1,28,500 | ₹88,000 (₹70,000 shares + ₹18,000 interest) |
| If issuer defaults | Principal and remaining interest at risk | Principal and remaining interest at risk |
The example shows the trade-off clearly. The NCD’s outcome does not depend on the share price, provided the issuer pays. The convertible wins if the company does well and loses if the share price falls. Neither instrument protects you from an issuer that cannot pay.
Taxation in 2026 (general rules)
India’s Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, and section numbers have changed. The broad treatment of debentures, as we understand it for tax year 2026-27, is:
- Interest: added to your income and taxed at your slab rate under whichever regime you use. Issuers may deduct TDS on interest; the TDS is credited against your final tax.
- Listed debentures sold on the exchange: gains on units held for more than 12 months are long-term and have been taxed at 12.5% without indexation since July 2024; shorter holdings are taxed at slab rates.
- Unlisted debentures: since 23 July 2024, gains on transfer, redemption or maturity have been treated as short-term and taxed at slab rates, whatever the holding period.
- Conversion into shares: conversion of a debenture into shares of the same company is generally not treated as a sale, so tax usually arises when you later sell the shares.
Tax rules change with each Budget. Check the current position on the Income Tax Department e-filing portal or with a tax professional before investing. Our income tax hub for salaried taxpayers explains the old and new regimes.
How to judge an NCD or convertible before you invest
- Read the credit rating, not just the coupon. A coupon far above similar-tenure bank deposits usually signals higher default risk. Ratings of AA and above indicate stronger safety; lower ratings need extra caution.
- Check whether it is secured. Secured NCDs give investors a claim on specific assets if the issuer fails; unsecured or subordinated NCDs rank lower.
- Look at listing and liquidity. Listed NCDs can be sold before maturity, but trading volumes in many issues are thin, so you may have to sell at a discount.
- Understand call and put options. Some issues let the company repay early (call) when rates fall, which cuts your expected income.
- For convertibles, study the conversion terms. Note the conversion price, date and whether conversion is compulsory. Compare the conversion price with the current share price and the company’s prospects.
- Don’t concentrate. Spread money across issuers and keep debentures as one part of a portfolio that may also include deposits, debt funds and equity. Our guide to ETFs as an investment vehicle and the list of common SIP investor mistakes cover other building blocks.
Debentures, inflation and your goals
Fixed-coupon NCDs give certainty of cash flow, which suits retirees and anyone matching income to expenses. But a fixed coupon can lose purchasing power when inflation rises; see our piece on beating inflation in the long term. Senior citizens who want government-backed income may compare NCDs with the Senior Citizen Savings Scheme, which carries sovereign backing but has investment limits.
If you are tempted by a convertible because you like the company, ask whether you would buy its shares directly. If the answer is no, the lower coupon may not be worth it. If you want to invest in equities directly, read this primer on investing in NSE and BSE stocks first.
Need cash but don’t want to sell your investments? Compare loan against securities offers from RBI-regulated lenders.
Listed shares and mutual funds can be pledged for a loan instead of being sold; see our loan against shares calculator for how much you could raise. Lenders accept a narrower list of debt securities as collateral, and terms vary by lender.
Frequently asked questions
Which is safer, a convertible or a non-convertible debenture?
Neither is automatically safer. Both depend on the issuer’s ability to pay. A secured, highly rated NCD has lower default risk than an unrated convertible, but a convertible from a strong company may suit someone seeking equity upside. Compare ratings, security and terms.
Can I sell an NCD before maturity?
Yes, if it is listed and you hold it in demat form, you can sell it on the exchange. Liquidity varies by issue, so you may get less than face value. Unlisted NCDs are much harder to exit early.
Are NCD returns guaranteed?
No. The coupon is a contractual promise by the issuer, not a guarantee. If the issuer defaults, both interest and principal can be delayed or lost. NCDs are not covered by bank deposit insurance.
Is interest from NCDs taxable?
Yes. Interest is added to your income and taxed at your applicable slab rate. TDS may be deducted by the issuer, and you claim credit for it in your return.
What happens to a convertible debenture if the share price falls?
If conversion is compulsory, you receive shares worth less than your investment and bear the loss. With an optionally convertible debenture, you can usually choose redemption in cash instead, subject to the issue terms.
Sources
Disclosure: FundsTiger (Gatimaan Finance Advisors Pvt. Ltd.) is a loan marketplace and lending service provider for RBI-regulated lenders. Aparampaar Finance Pvt. Ltd. (Omozing), one of those lenders, is a related party of FundsTiger. This article is general information, not financial advice. Read your loan agreement and KFS before you decide.