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Market Linked Debentures - Tax Benefits and Risks

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Divya Singhvi

Income from Capital Gains
Income Tax
market linked debentures
Last updated on July 24th, 2021

Market Linked Debentures are debentures where the pay-off is not defined as in a regular coupon-bearing debenture, but linked to the movement in another security or index such as NSE Nifty index or 10-year government security (G-sec) yield. For example, a 30-month MLD would pay the investor a pre-defined IRR at the end of the tenure if Nifty 50 Index does not fall by more than 75%. Market-Linked Investments may provide full or partial market downside protection and/or enhanced return potential.

Why Market Linked Debentures (MLD)?

A market-linked debenture does not pay any coupon before maturity. On maturity, apart from the initial principal component, there is a pay-off, i.e., a return payable. The advantage is that you are getting the exposure and upside in other markets such as equity (NSE Nifty) or G-sec, without taking as much of a risk as in investing directly into that asset.
If you invest directly in the Nifty or gold and Nifty or gold value declines over the investment horizon, you would lose a part of the principal.

Benefits of MLD

ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
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ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
[Rated 4.8 stars by customers like you]

Risks associated with Market Linked Debentures

Ask an Expert (TDS)
Talk to an expert via call, whatsapp or message. Ask questions about TDS Deduction, Rates, Forms, Return Filing & Compliance.
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Ask an Expert (TDS)
Talk to an expert via call, whatsapp or message. Ask questions about TDS Deduction, Rates, Forms, Return Filing & Compliance.
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FAQ

Are market-linked investments good?

Market-Linked Investments provide access to a wide variety of asset classes, including some not readily available to an individual investor. Further, these investements may provide full or partial market downside protection and/or enhanced return potential.

What is non convertible debentures?

Non-convertible debentures (NCD) are fixed-income instruments. They are usually issued by high-rated companies in the form of a public issue to accumulate long-term capital appreciation. They offer higher interest rates compared to convertible debentures.

How do we account for market linked debentures in books?

A market linked debenture is a loan taken by the company from the market with no provision of any fixed rate of interest. However, the return to the investors is dependent on some market index like Nifty or Sensex.

Got Questions? Ask Away!

  1. Hey Kunal,

    For capital assets like Equity & preference share, Debentures & Government securities, Units of UTI and equity-oriented mutual funds and Zero-Coupon Bonds where STT is paid

    • If such assets are sold within 12 months of purchase, it is considered short term capital gains
    • If assets are held for more than 12 months, it is considered long term capital gains

    However, the holding period is 36 months for other capital assets like house property, machinery, vehicles, etc

    You can refer to Capital Gains guide on our learn center.

  2. Hi @Ridhima_Sharma @TeamQuicko

    I bought 500 shares at 100 rupees each on May 05, 2020, thereby investing 50,000 in a company. When the share price appreciated to Rs. 200 each, I sold 250 shares on Feb 15, 2021, thereby taking my initial investment of 50k.

    As I have ONLY taken my initial investment out & not profit, will I be taxable under STCG ?

    Pl advise

  3. Hey @Abdul_Kaleem_shah, yes, you will have to file ITR 2 as the income you have received from selling the shares is considered as capital gains income and since you have sold it before holding them for 12 months it will be considered as STCG. You can read more about capital gains from here:

  4. If my Long term capital gains is below 1Lakh in a year, do I need to file ITR2 or I can just file ITR1 as usual (simple salaried with some interests). I read in few places, only over 1Lakh LTCG I’m liable to pay 10% taxes.

    My Scenario: I have few old shares, which are very good priced at the current bull market. Now if I sell them, I might make a bit profit. But my investment is so low, I don’t want to take the headache by going into ITR2 for the next 8 years. I have no intraday or short term share trades. Maybe the overall gain will be just a mere 3-4 thousands (even amount to withdraw is just 14k or so).

  5. Hey @sajalb, it is required that you file ITR 2 since you need to disclose the source of the income even though your profits are not taxable. Also, you do not have to file ITR 2 for 8 years in order to keep carry forwarding your losses.

  6. Thanks for the prompt reply. I understand it now. I hope I can cope up with the ITR2, feel very daunting to leave the comfort of ITR1.