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Best Debt Investment Options in India: Stable Returns, Safety & Tax Benefits

By Tata Capital
19 January 2026
9 mins read
3053

Are you considering investing in the best debt investment options in India? Here’s a quick reckoner!

There is so much about equity options and how to choose the best in them; there is very little covered about debt investment options. Debt instruments should be an integral part of your portfolio to build a comprehensive and well-balanced portfolio. The objective of investment options in India is to achieve optimal returns at a minimum level of risk.

Best Debt Investment Options and Debt Instruments in India

Often, debt instruments in India are synonymous with fixed deposits, which often form a major part of the portfolio without intending it. There are many other better-yielding debt instruments in India; we look at them here.

1. Corporate fixed deposits:

Corporate fixed deposits are term deposits that work exactly like your bank FDs but are offered by companies or NBFCs. They have a fixed tenure and fixed interest rate that is pre-determined and explicitly mentioned.

Corporate FD v/s Bank FD:
Corporate FDs tend to provide you with a higher interest rate as compared to Bank FDs. They may also have a lower penalty for early withdrawal as compared to bank FDs. The penalty charges for premature withdrawal of FDs are as per the guidelines set by RBI, whereas the penalty charges and tenure in the case of corporate FDs are determined by the NBFCs or the corporate that offers the deposits.

Risk-return: An important risk that one should consider while investing in Corporate fixed deposits is that the credit risk rating assigned to the deposit determines the company’s credibility in terms of payment of interest as agreed. The possibility of default risk in the case of corporate FDs is slightly higher when compared to that of bank FDs.

Best suited for: Corporate FDs are ideal for someone with a slightly higher risk appetite; a very conservative investor should steer clear of this investment option. One should look at a timeframe of around 6 months to 2 years. The income from Corporate FDs is taxable at normal rates, exactly as in the case of bank FDs.

2. Non-Convertible Debentures (NCD):

NCDs are one of the best debt instruments in India, which are similar to bonds; they are issued by corporates to raise capital for the long term. They are done via public issue; their characteristics are similar to those of bonds; they have a fixed tenure and a fixed interest rate, which is paid regularly. They are called non-convertible since they are not convertible into equity shares at the end of the tenure. There is a category of debentures which is converted into equity shares, hence the name to differentiate.

Types of NCD: There are 2 types of NCDs offered:

Secured NCDs:
As the name suggests, these are one of the best debt instruments in India, backed by the company’s assets. Upon default by the company to make payments to the investor, the investor will have the option to claim payments through the liquidation of the company’s assets.
Unsecured NCDs:
These instruments are not backed by company assets and hence are inherently riskier compared to secured NCDs. However, they tend to offer higher returns as compared to secured NCDs.

Risk-return: The interest rates are higher than other debt investments, such as Government bonds and fixed deposits; typically, the interest rates for NCDs range between 11% – 12%. The payment of interest could be monthly, quarterly, semi-annually, or annually, as mentioned in the details.

As indicated earlier, the risk profile is higher than that of conventional debt instruments in India; correspondingly, the interest payout is higher. These NCDs are rated by credit rating agencies, and one should look for a high credit rating, which is AAA or AA+.

Best suited for: NCDs are ideal for people who are looking for an alternative to Fixed deposits. They are typically well-suited for someone with a medium timeframe and relatively conservative investors.

3. Debt mutual funds:

Debt mutual funds are a variant within the mutual fund universe. It invests the pool of funds collected from investors in a set of fixed income securities such as government bonds, debentures, corporate bonds, money market instruments, etc., depending on the mandate of the fund. These funds offer the benefit of diversification by investing in a basket of debt investments.

Risk-return: Returns are not guaranteed. Fund derives returns from underlying debt portfolio instruments. They offer capital appreciation over a period of time. Since the returns are not guaranteed, they are subject to market risks.

Tax efficiency: Debt mutual funds are beneficial from a tax efficiency perspective.

Debt mutual funds are liable to taxes only on redemption; the gains are assessed under capital gains if you have held the mutual fund units for a period of less than 3 years, which is taxable at normal tax rates.

If held for over 3 years, they are assessed for long-term capital gains. You can avail of the indexation benefit, which adjusts the returns for the inflation rate and increases the purchase price, thereby bringing down the tax liability substantially. In the case of the dividend option, the dividend received is taxed at the marginal tax rate. Debt mutual funds have better liquidity compared to other debt instruments in India, except closed-end funds such as fixed maturity plans, which come with a certain lock-in period.

Best suited for: These funds are a great means to diversify your debt portfolio and add higher risk-adjusted returns. They also offer a great balance to your portfolio. There are a variety of debt mutual funds based on your risk appetite and tenure; you can choose based on what aligns best with your requirements. They also offer better liquidity compared to other debt investment options.

4. Market-linked debentures (MLD):

MLDs do not pay any coupon before maturity; upon maturity, a pay-off is paid along with the capital invested. This pay-off is not fixed or pre-determined as in the case of conventional debt investments. The pay-off depends on the underlying security or index movement as mandated in the scheme details. This is a relatively complex debt instrument; here is a simple debt instrument example: if a company were to issue an MLD with a coupon rate of 8% per year, with a maturity period of 14 months.

Risk-return: However, there may be a condition that the 8% payoff is applicable only if the 10-year Government bond price does not fall below 25% of its price at issuance of MLD when measured at the time of maturity. If the Government bond has fallen below the stipulated level, then you get only the principal back.

However, if the condition is met, then you will get the payout alongside your principal amount. The feature of not losing the principal amount despite market fluctuation is called the principal – protection feature, which is unique to these MLDs. In some MLDs, there is a greater linkage with market performance, and your principal is not protected. These instruments, too, carry the credit and liquidity risk as in the case of NCDs and corporate bonds.

Tax efficiency: This is a tax-efficient instrument. These MLDs are listed on the exchange, and redemption of these listed debentures is assessed under capital gains; if held for over a year, the taxability is 10%.

Best suited for: These instruments are slightly riskier compared to other options given above; the contractual aspects of these instruments are complex and require a trained mind to understand the nuances. An ideal timeframe for this investment would be medium to long term; the returns from this type of investment can be higher, but come at a higher risk. They are more suitable for higher-income slab investors.

Also, read – Private Credit vs Private Equity vs Public Debt

Top 10 Best Debt Investment Options in India

Here are the ten best debt investment options in India:

1. Debt Mutual Funds

These funds invest in bonds and money market papers. They offer better flexibility than FDs and suit short- to medium-term goals, but returns can change with interest rates.

2. Public Provident Fund (PPF)

This is a government-backed option with a 15-year tenure. Contributions qualify for tax benefits, and maturity proceeds are fully tax-free, making it ideal for long-term safety.

3. Corporate Bonds

High-rated corporate bonds can give higher returns than FDs. They suit investors seeking stable income with slightly higher risk than government-backed products.

4. Fixed Deposits (FDs)

FDs offer guaranteed returns and low risk. They are easy to invest in and allow premature withdrawal, sometimes with a small penalty.

5. RBI Floating Rate Savings Bonds

These bonds are issued by the RBI with a 7-year lock-in. Interest rates change with government benchmarks, offering safety but taxable returns.

6. National Savings Certificate (NSC)

This 5-year government-backed scheme offers guaranteed returns and tax benefits under Section 80C.

7. Post Office Savings Schemes

Options like MIS and KVP offer stable returns, easy access, and government security.

8. Senior Citizens’ Savings Scheme (SCSS)

Designed for retirees, it pays regular interest and offers higher returns than most FDs.

9. Government Securities

These are risk-free instruments backed by the government. They are suitable for conservative investors.

10. Infrastructure Bonds

These long-term bonds offering tax benefits and steady returns are best for investors with patience and low liquidity needs.

Also, read – Equity-Debt split by age and risk tolerance explained

How to Invest in Debt in India: Step-by-Step Guide for New Investors

Wondering how to invest in debt instruments? All you need to do is follow these steps:

Step 1: Set Your Investment Goal

Decide why you want to invest in debt. It could be for short-term savings, regular income, or long-term financial stability.

Step 2: Understand Your Risk Comfort

Check how much risk you can handle. Safer investors should prefer short-term and high-quality debt options.

Step 3: Review the Debt Option

Look at past returns, costs, and the credibility of the fund manager or issuer before investing.

Step 4: Choose the Investment Mode

Select between direct plans with lower costs or regular plans through advisors for guidance.

Step 5: Complete the KYC Process

Submit PAN, address proof, and identity documents to meet regulatory requirements.

Step 6: Open an Investment Account

Invest through a mutual fund platform, bank, or broker, either online or offline.

Step 7: Monitor Your Investment Regularly

Track performance and adjust investments based on your goals and market conditions.

Conclusion

This gives you a bird’s eye view of the best debt instruments in India available for investments. It is time to start exploring beyond your bank fixed and post office deposits. To get a deep dive into your investment options, reach out to our financial counsellors at TATA Capital, who will help you find the best debt investment options for your risk appetite and financial goals.

FAQs

What are the safest debt investment options in India for risk-averse investors?

Some of the safest debt investment examples include fixed deposits, PPF, NSC, RBI Floating Rate Bonds, and post office schemes. They offer stable returns, low risk, capital protection, and strong government or bank backing.

How do I start investing in the best debt instruments in India as a beginner?

To invest in the best debt instruments in India, start by setting a clear goal and understanding your risk comfort. Complete KYC, open an investment account, and begin with simple options like FDs or debt mutual funds using small, regular investments.

Which is the best debt investment option in India offering the highest returns?

Corporate bonds, credit risk debt funds, and long-term bond funds may offer higher returns than FDs. While these are the best debt investment options in India, they also carry higher credit or interest rate risk and need careful selection.

What is the lock-in period for most debt investment products in India?

Lock-in periods differ by product. PPF has a 15-year lock-in, NSC has 5 years, while most debt mutual funds have no lock-in and allow flexible withdrawals.

How is interest from debt instruments taxed in India?

Interest from FDs, bonds, and debt mutual funds is generally taxed according to your income tax slab. Some government schemes, like PPF, provide tax-free interest benefits under current rules.

Are debt mutual funds better than FDs for 2026?

Debt mutual funds may suit investors seeking flexibility, better liquidity, and potential tax efficiency. FDs remain better for those who want fixed, guaranteed returns without exposure to market risks.

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Best Debt Investment Options in India: Stable Returns, Safety & Tax Benefits

Best Debt Investment Options and Debt Instruments in India

Top 10 Best Debt Investment Options in India

How to Invest in Debt in India: Step-by-Step Guide for New Investors

Conclusion

FAQs

What are the safest debt investment options in India for risk-averse investors?

How do I start investing in the best debt instruments in India as a beginner?

Which is the best debt investment option in India offering the highest returns?

What is the lock-in period for most debt investment products in India?

How is interest from debt instruments taxed in India?

Are debt mutual funds better than FDs for 2026?

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