Debentures are a type of debt instrument issued by companies to raise funds from investors. When you invest in a debenture, you are lending money to the company, and in return, you receive regular interest payments and the principal back at maturity.
Debentures are not backed by physical assets but by the creditworthiness and reputation of the issuer.
| Feature | Bonds | Debentures |
|---|---|---|
| Issued By | Governments & Corporates | Mostly Corporates |
| Backed By | Assets or Sovereign Guarantee | Typically unsecured (may be secured) |
| Risk | Generally lower (govt bonds are safest) | Higher, especially if unsecured |
| Interest | Usually lower | Higher, to compensate for added risk |
Debentures often carry higher returns but also higher credit risk, especially when unsecured.
Common types of debentures include:
Secured Debentures: Backed by company assets (lower risk)
Unsecured Debentures: Not backed by collateral (higher risk)
Convertible Debentures: Can be converted into equity shares after a certain period
Non-Convertible Debentures (NCDs): Cannot be converted into shares; offer fixed interest
Perpetual Debentures: Have no maturity date; interest paid indefinitely
You can invest through:
Public issues of NCDs listed on NSE/BSE
Private placements via brokers or wealth platforms
Debt mutual funds that hold debentures
Bond marketplaces or investment platforms offering retail access
Minimum investment for public NCD issues usually starts from ₹10,000.
Safety depends on:
Issuer’s credit rating (look for AAA or AA-rated companies)
Type (secured debentures are safer than unsecured)
Market conditions and the issuer’s financial health
Interest Income: Taxable under “Income from Other Sources” as per your income tax slab.
Capital Gains: If sold on exchange, applicable capital gain tax would be charged.
Key risks of debentures
Credit Risk – The issuer might default and not repay.
Interest Rate Risk – Rising rates can reduce debenture value.
Inflation Risk – Fixed interest loses value over time.
Liquidity Risk – Hard to sell quickly or at a fair price.
Reinvestment Risk – You may have to reinvest returns at lower rates.
Call Risk – Issuer may repay early if rates drop, reducing your income.
Subordination Risk – In bankruptcy, you may be last to get paid.
Company Risk – Poor company performance affects repayment.
