Even if you fall in the highest tax bracket, your returns, post-tax (30.9 per cent) will be 7.6 per cent (pre-tax yield of 11 per cent). If you are in the lower tax bracket of 10 per cent, the yields are much higher, and if you fall in the zero tax bracket, the entire interest is yours to keep.

Given the limited options one has, the returns offered by NCDs are very attractive and must be looked at for boosting post-tax returns. If you have a choice, you can invest in your parents’ name to benefit from the higher post-tax yield.

At the same time, it is important to choose your option wisely. A look at the interest rate table will clearly tell you that the cumulative option appears most attractive, as it offers the highest yield by allowing you to reinvest the interest at the same coupon rate (assuming the put/call option is not being exercised). In sum, you eliminate the reinvestment risk.

On the other hand, if you want a regular income, then you could also look for other interest payout options offered such as monthly, quarterly, half-yearly or annual interest payments, but the coupon rate offered is usually lower. 

Interest income from NCDs will be subject to your normal rate of taxation. NCDs can also be sold on the stock exchanges before maturity at a premium, incurring capital gains tax (if sold after one year, the long-term capital gains tax), which is lower than income tax for someone in the highest tax bracket. 

The key issue with the first option is lack of liquidity. Just because the NCD is listed on the NSE does not mean there are people willing to sell. Additionally, a sale on the NSE also entails an interest rate risk, This is because if the interest rate goes down, then the value of the NCD increases (which is great). However if interest rates go up, the value of the NCD goes down. However, if you hold the NCD till maturity, interest rate risk is eliminated.

Listing on the stock exchange also means you must have a Demat account, without which it is not possible to invest in NCDs. 

Despite the secured assets and high credit rating, NCDs are not 100 per cent safe and there is a risk of default that exists. Still, while interest rates on corporate FDs and NCDs are almost similar, the safety element and the potential to earn higher returns through capital appreciation makes NCDs a much better option. Even when compared to bank FDs, NCDs are a better alternative, as the returns are higher (post-tax is substantially higher with no TDS) at an incrementally higher risk.

Many investors did not get allotments or got a lower allotment in the Tata Capital NCD issue. Recent NCDs are now coming up on a first come, first serve basis. There might be a lot more NCD issues in the next 6-12 months. Apply on the first day itself if you are in the High Net Worth category, as a good issue (with double-digit interest rates, safety and a brand) will hit the HNI target on the first day itself.

The writer is director, My Financial Advisor