Market-Linked Debentures Post Sebi Reclassification: What Changed For Investors

Between 2018 and 2022, market-linked debentures raised a total of Rs. 83,000 crores in India. The appeal of MLDs for investors was primarily driven by favourable tax treatment. Earlier, equity taxation rules applied to listed MLDs, and LTCG was charged at 10% for a holding period of over 12 months.  

However, this changed in 2023 with SEBI’s market-linked debenture reclassification. Effective 1st April 2023, MLD capital gains are taxed as short-term gains at slab rates. This change of MLD taxation in India has significantly impacted investors, specifically HNIs and family offices that invested in MLDs for the tax advantage.

(source: FIDC)

What are Market-Linked Debentures? 

Before we proceed to SEBI’s 2023 market-like debenture revisions, let’s understand the meaning of MLDs first. MLDs are structured, fixed-income securities where the returns depend on the performance of the underlying market asset or benchmark linked with them. 

MLDs may be linked to benchmark the Nifty 50, Sensex, the 10-year G-Sec yields, or prices of commodities like gold. The offer document of the MLD outlines the specifics of the underlying security and its performance requirements when issuing the MLD.

Key features of MLDs in India:

• Only principal-protected MLDs are issued in India, meaning the issuer repays the principal, even if the underlying asset doesn’t perform well.
• MLDs typically have a tenure of 1 to 5 years in India.
• Returns from MLDs are not guaranteed and depend on the performance of the underlying index or asset.
• MLDS in India can be listed or unlisted.
• Credit agencies rate MLDs (just like bonds) to help investors understand the creditworthiness of the issuer. 

Market-Linked Debentures: SEBI 2023 MLD Taxation Change

One of the main advantages of MLDs was their favourable taxation benefits. But in 2023, SEBI changed market-linked debenture taxation rules, and as an investor, you must know about these changes:

What Were the Earlier Rules on MLD Taxation in India?

Before 2023, MLDs were treated as capital assets. This meant MLDs had equity taxation rules where:

• If they were held for more than 12 months, capital gains were subject to Long-Term Capital Gains (LTCG)
• LTCG on listed securities was taxed at 10% (above ₹1 lakh)

This made MLDs highly tax-efficient compared to other fixed-income options.

What changed in 2023?

With Budget 2023, the MLD taxation in India changed completely. According to these new rules, SEBI reclassified market-linked debentures as any other debt instrument. 

That’s why, now:

• MLD capital gains are taxed as short-term capital gains 
• The concessional LTCG rate is no longer applicable
• Returns are added to your income and taxed at the applicable income tax slab (which can be as high as 30%)

Simply put, MLD capital gains were earlier taxed like stocks. But after the 2023 taxation amendment, MLD capital gains are now taxed like bonds and other fixed-income investments. 

MLD Taxation in India: What Changed for Investors?

Tax changes introduced by SEBI’s 2023 market-linked debenture revision have a significant impact on investors, especially those who were using MLDs for tax efficiency. 

Here’s how MLD taxation changes from 2023 may impact you:

• Lower Post-Tax Returns 

Earlier, capital gains from MLDs were taxed at a flat rate of 10% if the units were held for more than 12 months. This LTGC rate would mean a higher post-tax yield. 

Now, with SEBI’s 2023 MLD taxation amendment, gains are taxed at slab rates. This means your MLD capital gains may be taxed up to 30% if you fall in the highest tax bracket. 

Since MLDs were always preferred by HNIs (who typically fall in the highest tax brackets), this can significantly impact their effective return from the investment.  

• Reduced Tax Advantage

Investors often preferred MLDs because of the tax advantage they brought to the table over other fixed-income investments, like:

• Fixed deposits
• Vanilla non-convertible debentures (NCDs)

However, with SEBI’s 2023 revision of MLD taxation in India, this advantage has almost disappeared. With that advantage removed, the difference between MLDs and other debt products has narrowed.

• Greater Focus on Risk Vs. Reward

Earlier, MLDs were often chosen for their tax efficiency. But with that advantage removed, investors need to evaluate them more carefully on fundamentals.

While many MLDs are structured to be principal-protected, this protection still depends on the issuer’s creditworthiness.

As a result, investors now need to focus more on:

• The underlying market risk linked to returns
• The credit quality of the issuer
• Whether the post-tax returns justify the complexity and risk

Understanding Changes in MLD Taxation: An Example

Let’s understand how changes in MLD capital gains taxation impact investors with an example. Let’s say you invest Rs. 10 lakhs in an MLD with a 15-month tenure. The MLD offers you a return of 10% over the investment period. At maturity, your MLD capital gains stand at Rs. 1 lakh. 

Now, under the earlier MLD taxation rules in India, your gains would be taxed at 10%, since the holding period was more than 12 months. This means:

• Tax on Rs. 1 lakh = Rs. 10,000
• Post-tax return = Rs. 90,000
• Effective return = 9%

Now, if the same investment were to be taxed as per your income slab (as per SEBI’s 2023 market-linked debenture taxation amendment), things will change. 

Let’s say you fall under the 30% tax bracket. In this case, your MLD capital gains taxation will look like:

• Tax on Rs. 1 lakh = Rs. 30,000
• Post-tax return = Rs. 70,000
• Effective return = 7%

So, even though the pre-tax return remains the same, the post-tax outcome is significantly lower, which directly impacts the overall attractiveness of the investment.

MLDs Vs. NCDs: What Investors May Consider Now? 

Investors have always compared MLDs and NCDs to choose an option that’s most favourable for them. With changes in MLD taxation in India, this comparison becomes even more important, and frankly, easier. 

Earlier, MLD tax advantages gave these investment vehicles an edge over vanilla NCDs. However, post SEBI’s 2023 market-linked debenture reclassification, both MLDs and NCDs are now taxed similarly – at slab levels. 

So now the MLD vs. NCD debate is mostly focused on risks, potential returns, and structure:

So, MLD Taxation No Longer Has LTCG Benefits

SEBI’s reclassification of market-linked debentures as other debt assets has brought significant changes for investors: 

• MLD capital gains were taxed as listed equity shares at 10% LTCG for holdings of over 12 months.
• Post 2023, MLD capital gains are taxed as short-term gains at slab rates.
• Taxation at slab rates may mean a higher tax outflow for investors in higher tax brackets.

This doesn’t mean MLDs have lost their appeal. It simply means you now have to evaluate them with any other fixed-income asset to understand if the risk is worth the potential returns.

Investors looking for simple and predictable income from fixed-income assets can consider high-quality bonds or NCDs from GoldenPi. You can visit the GoldePi website to choose from different baskets and make your investment.

FAQs

What is the minimum investment amount required for MLDs in 2026?

Effective from 1st April 2023, the minimum investment amount required for MLDs in India is Rs. 1 lakh. This minimum entry amount was reduced by SEBI to encourage more retail participation. 

Which should I choose: MLDs vs. NCDs?

With the tax advantage of MLDs gone, both instruments have the same tax treatment now (at slab rates). So the choice between these two depends on your risk appetite, income expectations, and understanding of the instrument.

For instance, you may consider NCDs if you prefer a stable income at fixed coupon rates, since MLD returns depend on the performance of the underlying asset and set requirements. 

What are the risks associated with MLDs?

MLDs carry various risks, including:

• Market risk: Returns from these investments are not guaranteed and depend on certain conditions, making them vulnerable to market risks. 
• Credit risk: The principal repayment depends on the issuer’s creditworthiness.
• Liquidity risk: Liquidity risk is high for MLDs as it is difficult to find buyers in the secondary market. 

Disclaimer:

This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.

Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.