Market-Linked Debentures (MLDs)

Market-Linked Debentures (MLDs) offer a unique blend of debt and equity characteristics, providing investors with a potential for higher returns than traditional fixed-income instruments while maintaining some level of capital protection.

How it Works: Imagine a loan with a guaranteed interest rate (like a fixed deposit) but also linked to the performance of an underlying asset (like a stock or index). This is the essence of MLDs.

Benefits

• Higher Potential Returns: Compared to traditional fixed-income options, MLDs offer the chance for greater returns if the linked asset performs well.
• Partial Capital Protection: MLDs often come with a minimum guaranteed return, safeguarding a portion of your investment even if the market dips.
• Diversification: MLDs can add a layer of diversification to your portfolio, potentially mitigating overall risk.

Gold-linked MLDs are a common variant — see our dedicated Gold MLD guide for how those are structured.

Investing in MLDs

• Understand the Risks: MLDs are not without risk. The potential for higher returns comes with the possibility of lower returns or even losses if the linked asset underperforms.
• Choose the Right Issuer: Research the issuer's creditworthiness and track record to ensure they can fulfill their obligations.
• Consider Your Investment Horizon: MLDs may have lock-in periods or specific exit strategies, so align them with your investment goals.

Market-Linked Debenture (MLD) Taxation in India

Market-Linked Debentures (MLDs) taxation can be slightly different compared to traditional fixed-income instruments. Here's a breakdown:

Changes as of April 1, 2023:

• Previously: Gains from selling MLDs held for over 1 year were considered Long-Term Capital Gains (LTCG) and taxed at a flat rate of 10% (plus surcharge), making them attractive for investors seeking tax efficiency.
• Currently: As per the Finance Act 2023, any gains from transferring or redeeming MLDs are classified as Short-Term Capital Gains (STCG) and taxed at the investor's marginal income tax rate (slab rate). This means HNIs falling in higher tax brackets could face a tax rate of up to 30% (plus surcharge) on their MLD gains.

Key Points to Remember

• Holding Period: The holding period for MLDs is now irrelevant for tax purposes. Any gains, regardless of the holding period, are considered STCG.
• Taxation of Interest Income: The interest earned on MLDs is treated as regular income and taxed as per the investor's applicable income tax slab.
• Comparison with Other Debt Instruments: While MLDs previously offered a tax advantage over other debt instruments like debt mutual funds (which have a 3-year gestation period for LTCG benefits), the recent change has eliminated this advantage.

Impact on Investors:

• Investors who held MLDs before April 1, 2023, and redeem them after that date will be subject to the new STCG tax regime.
• This change may make MLDs less attractive for investors in higher tax brackets seeking maximum tax efficiency.

Additional Resources:

• Market-Linked Debentures Investment – Impact of Finance Act 2023: https://www.taxmann.com/budget