Market Linked Debenture
Also written MLD · Market Linked Debenture (MLD) · Market linked debentures · Structured debenture
A debenture whose return is linked to an underlying index or security rather than being a fixed coupon; since Section 50AA its gains are short-term capital gains taxed at slab, whatever the holding period.
In plain language
An MLD looks like a bond and is taxed like nothing else.
It is a debt instrument, but the return is not fixed. It is linked to the performance of an underlying market index or security, so the movement of that underlying determines what the investor gets back. There is normally no periodic coupon — the whole return arrives at maturity as principal plus whatever interest the formula produced.
Two varieties exist. Principal Protected MLDs guarantee the return of the principal at maturity whatever the underlying did. Principal Non-Protected MLDs do not.
How it works
Who issues and who buys. MLDs can be issued by companies with a minimum net worth of Rs 100 crore, and are typically bought by high-net-worth and ultra-high-net-worth individuals. Tenure is generally 12 to 36 months.
The tax change is the whole story. Up to FY 2022-23, income from MLDs was taxed much like income from any debenture or coupon bond, and a listed MLD held long enough could be taxed as a long-term capital gain. With effect from FY 2023-24, Section 50AA was inserted, and it does three things:
- Gains on the transfer, redemption or maturity of an MLD are short-term capital gains irrespective of the period of holding, taxed at the assessee's normal rates.
- Cost of improvement is taken as nil, whether incurred by the assessee or by a previous owner.
- It applies to any MLD transferred, redeemed or matured on or after 1 April 2023 — even if the MLD was issued or acquired before that date.
The computation itself is plain: full value of consideration, less cost of acquisition, less expenditure incurred wholly and exclusively in connection with the transfer, redemption or maturity.
The formula
Full value of consideration xxx
Less: Cost of acquisition of the MLD (xxx)
Less: Expenditure wholly and exclusively in connection
with transfer, redemption or maturity (xxx)
-------
Short-term capital gain (whatever the holding period) xxx
taxed at the assessee's normal slab rates
A worked example
Mrs Anand, in the 30% slab, invests Rs 25,00,000 in a 36-month principal-protected MLD linked to the Nifty. It matures at Rs 34,00,000. Brokerage and charges on redemption come to Rs 15,000.
Full value of consideration Rs 34,00,000
Less: cost of acquisition Rs 25,00,000
Less: redemption expenditure Rs 15,000
-------------
Short-term capital gain Rs 8,85,000
Tax at 30% Rs 2,65,500 (plus cess)
Three years of holding bought her nothing. Under Section 50AA the gain is short-term however long it was held.
Compare a plain listed bond bought and sold for the same amounts and held the same 36 months. Held for more than 12 months it is a long-term capital asset, taxed at 12.5%:
Long-term capital gain Rs 8,85,000
Tax at 12.5% Rs 1,10,625
A difference of Rs 1,54,875 on an identical Rs 8.85 lakh of gain, turning entirely on the label of the instrument. An adviser who compares MLDs with bonds on headline return and not on post-tax return is giving the client the wrong answer.
Why NISM asks about it
Chapter 10 (Taxation of Debt Products), section 10.5 Taxation of Market Linked Debentures and section 10.6 Benefits not allowed from capital gain arising from MLDs or the two types of Specified Mutual Funds under Section 50AA. This is a short, heavily-tested section because it is a recent change. Expect a true/false on whether period of holding matters (it does not), a computation of the short-term gain, and a comparison question against a listed bond or an equity-oriented fund.
Common exam traps
- Period of holding is irrelevant. Three years, three months — still short-term under Section 50AA.
- The rule follows the date of transfer, not the date of purchase. An MLD bought in 2021 and redeemed in 2024 is caught.
- No indexation, and no cost of improvement. Cost of improvement is deemed nil.
- "Principal protected" protects the principal, not the return. It is not a guaranteed-return product, and the protection is only as good as the issuer.
- The same Section 50AA treatment applies to Specified Mutual Funds. A question naming an SMF is testing the identical rule.
- Normal slab rates, not a flat 20%. For an investor in a lower slab the outcome is far less punitive than the headline suggests.
Check yourself
1.What is the minimum net worth required of a company issuing Market Linked Debentures?
- a)Rs 10 crores
- b)Rs 50 crores
- c)Rs 100 crores
- d)Rs 500 crores
Show the answer
Answer: (c) Rs 100 crores
The workbook states that MLDs can be issued by companies with a MINIMUM NET WORTH OF RS 100 CRORES, and that investors are typically high-net-worth individuals or ultra HNIs. The other examinable numbers are the tenure — generally between 12 to 36 months — and the fact that MLDs offer returns ONLY UPON MATURITY, with no periodic interest payments.
Where this is taught
- Series XXI-B · Chapter 10: Taxationintroduced here
- Series X-B · Chapter 8: Capital Gainsintroduced here
- Series X-A · Chapter 7: Introduction to Investmentsintroduced here
- Series X-B · Chapter 10: Taxation of Debt Products
Related terms
- Credit riskThe risk that a borrower fails to meet its obligations on a debt instrument — the risk credit rating agencies exist to grade, and the one that triggers a segregated portfolio in a mutual fund.
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Long-term capital assetA capital asset held for more than the prescribed period before transfer — generally more than 24 months, and more than 12 months for listed securities and equity oriented fund units.
- Short-term capital assetA capital asset taxed as short-term: listed securities held 12 months or less, unlisted securities 24 months or less, plus MLDs, specified mutual funds and unlisted bonds deemed short-term whatever the holding.
- Specified Mutual FundA mutual fund caught by section 50AA — gains on it are short-term no matter how long it was held, and are taxed at the investor's slab rate.
- Coupon rateThe rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Coupon bondAn ordinary bond that pays periodic interest — the coupon — over its tenure and returns the face value at maturity, taxed differently depending on whether it is listed and how long it is held.
- Prospective applicationSection 50AA's rule that its short-term-gain treatment applies only to Specified Mutual Funds acquired on or after 1 April 2023 — units bought earlier keep the ordinary capital gains rules.
- Pre-redemption liquidity of debt instrumentsThe workbook's observation that exiting a debt instrument in India before its maturity is typically difficult, and where a market does exist, the seller usually has to accept a materially lower price to find a buyer.
- Forfeiture of warrant premiumThe upfront payment a share warrant holder loses by not exercising the warrant within 3 months of paying full consideration gets no tax treatment at all — the loss is simply ignored.
- Structured productA pre-packaged instrument built on a traditional investment such as a bond or currency, with an embedded derivative such as an option or swap — complex, customised, illiquid and meant for high net worth investors.