Budget ends tax advantage in MLDs, move to impact wealthy investors

Products that invest in fixed-income and derivative instruments enjoyed taxation for bonds

The Union Budget on Wednesday plugged a loophole in the taxation of listed market-linked debentures (MLDs). From Financial Year 2024, returns from listed MLDs will be taxed as short-term capital gain instead of long-term capital gain. This implies that gains from MLD investment will be taxed at the investor's slab rate (which can be as high as 30 per cent) instead of 10 per cent now.

MLDs, which are hybrid or structured products that invest in fixed-income and derivative instruments, enjoyed taxation applicable on bonds despite being more of a derivative product, the government said in the Budget note.

"The tax advantage that listed MLDs enjoyed has now been done away with. Investors will now have to pay short-term capital gains tax," said Joydeep Sen, an independent debt market analyst.

The change in tax structure will take away the product’s appeal, said analysts. Since MLDs come with a minimum ticket size of Rs 10 lakh, most of their investors fall in the highest tax bracket. Such investors will have to pay 20 per cent more tax on the gains from the next FY (considering the highest tax slab of 30 per cent).

MLDs returns are linked to equity market performance. Even if the underlying index doesn’t perform well, most MLDs offer a guarantee of returning the principal amount. MLDs are issued for 13 to 60 months by entities having a net worth of at least Rs 100 crore. These funds are regulated by the Securities and Exchange Board of India (Sebi). Fund-raising through MLDs is popular among non-banking financial companies (NBFCs).