MLDs – Vinod Kothari Consultants

Shorn of tax benefit, MLDs now face tax deduction on payouts

Dayita Kanodia | Executive

Background

The Finance Bill, 2023^[1], has quite nearly caused the demise of the so-called “Market-Linked Debentures” (MLDs)^[2]. The changes made pursuant to the Finance Bill, 2023, took away what seemed to be a strong reason for popularity of MLDs, i.e., the tax arbitrage.

Prior to the change, listed MLDs had the advantage of being exempt from the withholding tax under section 193 of the Income Tax Act, 1961, as well as being taxed at 10% as Long Term Capital Gains (LTCG) tax, if held for at least 12 months.

Finance Bill, 2023 inserts a new section 50AA to the Income Tax Act, 1961, which makes MLDs to be taxed at slab rates as a short term capital asset in all cases at the time of transfer or redemption on maturity, irrespective of the period of holding, therefore losing out on the earlier lower LTCG rate of 10%.

In addition, the earlier exemption from withholding tax on listed debentures has now been removed pursuant to an amendment in section 193, which means that interest paid on listed debentures would now be subject to withholding tax with effect from April 01, 2023^[3].

Melt-down of Market-linked debentures, Debt mutual funds get fatal blow

March 24, 2023/0 Comments/in Bond Market, Capital Markets, Financial Services, SEBI /by Vinod Kothari

No grandfathering for MLDs, prospectively, tax benefit for debt mutual funds goes away

-Vinod Kothari and Aanchal Kaur Nagpal

finserv@vinodkothari.com

As expected, the Finance Bill, 2023 was passed on March 24, 2023 by Lok Sabha within minutes. With a huge amount of changes including several newly inserted provisions, the so-called amendments were actually a Bill in itself, minus any “notes on clauses” or “memorandum of delegated legislation”, and given the amending document that refers to page numbers and line numbers of the Bill, it is a hard to read document, more so to realise the long term impact it has for the capital markets.

For capital markets, the amended Bill confirms that there will be no grandfathering for market-linked debentures (MLDs), as it specifically provides for a grandfathering only for debt mutual funds. Thus, the future of an approximately Rs. 20 lakh crore non-equity-oriented mutual funds in the country^[1], going forward, will be questionable.

Market-linked debentures: Is it the end of the market for them?

February 1, 2023/4 Comments/in Budgetary Publications, Capital Markets, Financial Services, Taxation /by Aanchal Kaur Nagpal

– 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.