Debentures vs Bonds: Key Differences Indian Investors Should Know

If you’re an Indian investor, you’ve probably come across the terms debentures and bonds while exploring fixed-income options. While both are debt instruments and offer steady income, the issuer, risk, returns, tax treatment, and legal structure differ significantly.

In this guide, we’ll break down debentures vs bonds, explain how each works in the Indian context, and help you decide which one fits your investment goals best.

What Are Debentures?

A debenture is a debt instrument. It is issued by a company (private or public) to raise funds. According to section 2(30) of the Companies Act, 2013, debentures include bonds and other company securities, whether or not they are backed by the company’s assets.

In simple terms, debentures are issued by companies to borrow money from the public. Unlike bank loans, companies use debentures to raise large funds directly from investors.

Types of Debentures

Here are the different types of debentures in India.

1. Secured debentures

These are backed by the company’s tangible assets, like property, machinery, or receivables as collateral. If the company defaults, these assets can be sold to repay you. 

You can think of them as “mortgaged loans” for companies. They carry lower risk and are popular among conservative investors.

2. Unsecured debentures

There’s no collateral here. That means there’s no specific asset backing your investment. You’re relying purely on the company’s ability to repay. 

If the company runs into financial trouble, secured debenture holders will be paid first, which makes this a riskier option. 

However, to balance that risk, these debentures usually offer higher interest rates. They’re better suited for investors who are comfortable taking on a bit more risk in exchange for potentially higher returns.

3. Convertible debentures

Convertible debentures start as debt—you lend money to the company and earn interest. But after a set period, you have the option to convert them into equity shares of the issuing company.

4. Non-convertible debentures (NCDs)

Non-convertible debentures are pure debt instruments, meaning they will never convert into company shares. Hence, you get no equity, no ownership, just steady interest.

If you’re someone who wants to earn regular income (like quarterly or annual interest payouts) without worrying about share prices rising or falling, NCDs can be a solid pick. They’re especially popular among retirees or investors with low risk tolerance.

Who issues debentures?

Debentures are typically issued by private and public limited companies. In India, well-known companies like Tata Motors, L&T, and Muthoot Finance often issue debentures to fund expansion, refinance debt, or manage working capital.

Risks and return expectations from debentures

What Are Bonds?

Bonds are debt instruments issued by governments, public sector undertakings (PSUs), and other regulated bodies to raise money from the public. 

When you invest in bonds, you’re basically lending money to the issuer. In return, you get regular interest payments (called the coupon) and the principal is returned to you on maturity.

In India, bonds are considered one of the safest fixed-income options, especially when backed by the government. They’re governed by strict regulations under SEBI and the RBI, ensuring greater transparency and investor protection.

For example: The RBI floating rate savings bonds. These bonds, issued by the RBI, currently offer a floating interest rate (linked to the National Savings Certificate rate), with the latest yield around 7.10% (as of July 2025). They are considered virtually risk-free for Indian investors.

Types of Bonds

Let’s understand the different types of bonds to invest in.

1. Government bonds (G-Secs)

G-Secs are issued by the central or state governments. They’re considered one of the safest and low-risk investments because they’re backed by the sovereign guarantee of India. 

Read More: How Can You Buy Government Bonds in India?

2. PSU bonds

PSUs are issued by government-owned companies like IRFC, Power Finance Corp, NTPC, or PFC to raise capital for operations or infrastructure. While not sovereign-backed, they’re issued by government-owned companies, so they’re seen as relatively safe.

3. Municipal bonds

They are issued by urban local bodies to fund infrastructure projects.

4. Tax-free bonds

They are issued by entities like NHAI, REC, IRFC, etc. The interest earned in these bonds is 100% exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act.

Read More: What Are The Best Corporate Bonds In India In 2025?

Risk and return overview of bonds

Debentures vs Bonds: Key Differences 

Here’s a quick comparison table to help you see the differences at a glance:

Debentures vs Bonds: Which Is Safer for Indian Investors? 

Consider choosing based on the following factors:

Credit risk

• Debentures, especially the unsecured or low-rated ones, are riskier. If the company runs into trouble, you might get paid late or worse, not at all.
• Invest in the bond market, especially government ones (G-Secs), are backed by the government, making them one of the safest investments in India.

Credit ratings

• Always check ratings by agencies like CRISIL, ICRA, and CARE on the issuer’s financial health. Look for ratings like AAA (lowest risk) to C or D (high risk or default).
• A AAA-rated NCD is still riskier than a government bond, but safer than an unrated one.

Government-Backed Bonds = Maximum Safety

• If your goal is capital safety, nothing beats government-backed bonds. 
• G-Secs, Treasury Bills, and even PSU bonds (from IRFC, PFC, etc.) have much lower default probability.

Risk Appetite

• Conservative investors: Stick with G-Secs or PSU bonds.
• Moderate risk takers: Consider high-rated NCDs or secured debentures.
• Aggressive investors: May explore lower-rated debentures for higher returns—but be prepared for volatility.

What are the Tax Implications on Debentures and Bonds Investment?

Now let’s understand debentures vs bonds from a tax perspective. 

Taxation on interest earned

Interest income from debentures and bonds is taxed under the head “Income from Other Sources” (IFOS). The interest is added to your total income and taxed at your applicable income tax slab rate, whether you are an individual or an HUF.

Tax-free bonds (such as those issued by NHAI, REC, and IREDA) are an exception. Interest from these is fully exempt under Section 10(15)(iv)(h) of the Income Tax Act.

Differences in TDS Applicability: Debentures vs Bonds

Debentures: TDS applies if you earn more than ₹5,000 in interest in a year. The usual rate is 10% for residents.

Bonds: For most government and tax-free bonds, TDS is generally not deducted on the interest paid to resident individuals. However, for taxable bonds, TDS may apply if the payment threshold is crossed.

Special Cases: Section 194LD allows a concessional TDS rate of 5% for certain foreign investors on rupee-denominated bonds.

Capital Gains : Debentures vs Bonds

If you sell debentures or bonds before maturity, capital gains apply.

Tax-Free Bonds (NHAI, REC, IREDA, etc.)

Interest earned from tax-free bonds is fully exempt from tax under Section 10(15)(iv)(h) of the Income Tax Act. Capital gains on sale of these bonds are taxable as per normal rules (see table above).

CBDT Notification (July 2025): IREDA bonds are now eligible for tax exemption under Section 54EC. If you invest your long-term capital gains in them within six months, you can avoid paying tax on those gains.

Debentures vs Bonds: Which One Should You Choose? 

It all comes down to what you need as an investor. So before choosing, ask yourself:

• Do I want stability or am I okay with some risk for better returns?
• Do I care more about fixed income or tax savings?
• Can I lock in my money or will I need liquidity?

Whatever your answers, the key is to align your choice with your goals.

Consider the following factors before making a decision:

• Risk appetite: If you’re a conservative investor, go for government bonds. If you’re comfortable with some risk? Rated debentures or NCDs may suit you.
• Return expectations: Debentures offer higher returns but with higher risk.
• Tax considerations: Tax-free bonds (like NHAI, REC) offer exemption under Section 10(15). Debenture interest is fully taxable.
• Liquidity needs: G-Secs have better secondary market volumes. Some debentures are harder to exit early.
• Purpose of investment: Want capital protection? Choose bonds. Chasing higher yields? Consider secured NCDs.

Bonds & NCDs on Aspero: Something for Every Investor

Whether you’re looking for low-risk, long-term stability or higher-yield, short-duration returns, Aspero offers a curated selection of government bonds and corporate NCDs to suit different investor profiles.

Here’s a quick look at what’s available:

🛣️ Government-backed, AAA-rated options

• National Highways Infra Trust
  AAA | Up to 7.60% yield | Half-yearly payouts | Min. ₹317
  Ideal for conservative investors seeking long-term security.

🏢 Top-rated NBFCs with competitive returns

• Incred Financial Services Ltd
  AA- | 9.60% yield | Quarterly payouts | Min. ₹1,00,662

• Muthoot Capital Services Ltd
  A+ | 10.70% yield | Monthly payouts | Min. ₹98,943

📈 High-yield opportunities from emerging players

• Akara Capital Advisors Pvt Ltd
  BBB | 14.50% yield | Monthly payouts | Min. ₹9,477

• Spandana Sphoorty Financial Ltd
  A- | Up to 13.00% yield | Monthly payouts | Min. ₹98,721

• Kinara Capital Pvt Ltd
  BBB- | Up to 15.50% yield | Monthly payouts | Min. ₹98,388

From AAA to BBB-, and maturities ranging from just 8 months to 10 years, Aspero’s platform makes it easy to find the right fixed-income investments based on your risk appetite, return expectations, and liquidity needs.

FAQs: Debentures vs Bonds

1. Are debentures riskier than bonds?

Yes, debentures, especially unsecured ones, are riskier than government or PSU bonds.

2. Which is better: debentures or bonds?

It depends on your risk appetite. If you want safety, go for bonds. If you want higher returns and understand risk, then consider debentures.

3. Do bonds and debentures offer tax benefits?

Some bonds like NHAI are tax-free. Debentures are taxed as regular income. Always check terms before investing.

4. Are all bonds issued by the government?

No. Bonds can also be issued by companies, PSUs, municipalities, and financial institutions.