Market-linked debentures: Is it the end of the market for them?
– Aanchal Kaur Nagpal, Manager | finserv@vinodkothari.com
Tax proposal to tax gains on MLDs as short-term capital gains
The Budget proposes that the capital gains on market linked debentures (MLDs) will be taxed as short term capital gain.
Presently, MLDs are mostly listed, and as listed securities they have 2 advantages:
- First , there are exempt from withholding tax. This is one of the carve-outs in sec. 193
- Secondly, the holding period for capital gain purposes is 12 months, as opposed to 36 months in case of normal capital assets. This comes from sec. 2 (42A) of the Act. Therefore, if a listed security is held for at least 12 months, and transferred or redeemed thereafter, the gain will be taxed as long term capital gain, with a rate as low as 10%.
Market linked debentures is a concept that prevails world-over, with different names such as equity-linked bonds, index-linked bonds, etc. However, in India, the issuance of MLDs was being exploited as a regulatory and tax arbitrage device.
