Market-linked debentures under tax net

New Delhi: Market-linked debentures as an instrument will now be taxed as short-term capital gains as some experts said it was being used for blatant tax evasion.

The Union Budget 2023-24 carries an amendment in the Finance Bill to tax market-linked debentures as short-term capital gains.

Sandeep Bagla, CEO, Trust AMC said, "Another positive aspect of the Budget was to deal a body blow to so-called Market Linked Debentures (MLDs), which had degenerated to instruments of blatant tax evasion, by taxing the capital gains generated at the rate of Short Term capital gains."

As per the Finance Bill, a special provision for taxation of capital gains has been introduced in case of Market Linked Debentures.

It has been noticed that a variety of hybrid securities that combine features of plain vanilla debt securities and exchange traded derivatives are being issued through private placements and listed on stock exchanges.

It is seen that such securities differ from plain vanilla debt securities. 'Market Linked Debentures' are listed securities. They are currently being taxed as long-term capital gain at the rate of 10 per cent without indexation. However, these securities are in the nature of derivatives which are normally taxed at applicable rates, the amendment said.

Further, they give variable interests as they are linked with the performance of the market.

In order to tax the capital gains arising from the transfer or redemption or maturity of these securities as short-term capital gains at the applicable rates, it is proposed to insert a new section 50AA in the Act. This is to treat the full value of the consideration received or accruing as a result of the transfer or redemption or maturity of the 'Market Linked Debentures' as reduced by the cost of acquisition of the debenture and the expenditure incurred wholly or exclusively in connection with transfer or redemption of such debenture, as capital gains arising from the transfer of a short-term capital asset.

Further, it is also proposed to define the 'Market linked Debenture' as a security by whatever name called, which has an underlying principal component in the form of a debt security and where the returns are linked to market returns on other underlying securities or indices and include any securities classified or regulated as a Market Linked Debenture by Securities and Exchange Board of India.

This amendment will take effect from the first day of April, 2024 and shall accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years.