ZERO COUPON BONDS
Most times companies issue NCD / Bond at a face value of say Rs. 1000/- sometimes these bonds are issued at a discount and there is no interest paid by the company. Zero coupon means zero interest. Your gain is the difference between discounted price and money paid on maturity. This is a tax saving instrument since instead of regular tax on interest a capital gains tax (which is lower than normal tax) is paid by investor
Debentures are normally Secured by a charge on the assets of the company. By charge we mean if the company fails to pay interest or principal on due date then their assets (which are charged) will be sold off to pay the Debenture holders
There is an entity called Debenture Trustee which dose this work on behalf of the Debenture holders. Debenture Trustees are appointed by the company at the time of issue of NCD. The charge (registering of ownership in event of failure) is registered with the Registrar of Companies.
Rating is given by various rating agencies, It is advisable to go for highest rated NCD for the safety of principal and interest
Most NCD are listed on stock exchanges. Hence, they can be sold in event of need of liquidity. However, the rate in the market depends on accurued interest till date, prevailing bond yield , balance maturity etc.So the amount realised can be higher or lower as compared to realisation on maturity
NCDs pay a higher return than bank deposits and lower than company fixed deposits.
HOW TO INVEST
NCD can be purchased at the time of issue by the company. NCDs can also be purchased in open market on stock exchanges. These are normally available at rate derived from current yield, balance maturity etc. The price you pay consists of interest accrued till date ( of purchase) and principal amount. You can better your return if purchased in the market by a few basis points
There is no TDS on the interest paid by company on NCD. However, interest income is subject to tax under the head "Income from other sources". If you have bought the bonds from open market at a discount, then on maturity you will have to pay the difference in price paid by you and that received from company as capital Gains.
Certain Public sector companies issue tax free bonds from time to time. The interest from these bonds is not taxable