Market linked debentures (MLD) have been around for sometimes now and its unique structure where the coupon is not a fixed rate like common debentures but linked to certain events with some marginal uncertainty helped qualify them as a different class of asset for tax purposes.
A typical debenture or a corporate bond is akin to a normal deposit in a bank or a company and the interest paid periodically is taxed as regular income and also subject to deduction of tax at source.
However, MLD with its inherent structure where no ostensible coupon exist, was being viewed like a capital asset and the profit/gain on the sale or redemption was qualifying as a capital gain.
MLD issues typically get listed in the debt section of BSE and the tax rule that treats all listed securities held for more than twelve months as a long-term asset applies to this as well. Thus, a class of asset/investment not dissimilar to a corporate bond was getting a favourable tax dispensation, as long term capital gain on listed securities attract a much lower tax @ 10% plus applicable levies as compared to interest income attracting the schedule rates.
This arbitrage needed to be corrected and the budget announcement today has brought in a change. MLD will post 1st April 2024 assessment year (2023-24 previous year) will be treated as short term capital asset irrespective of its structure.
No legitimate grievance can be raised on the change as in fact, the short -term classification is generous in itself as tax payers who get a surplus on transfer of a MLD can adjust short term capital loss on any other asset. Whereas interest on normal debt issues don’t enjoy this benefit.
The legitimate grievance is however that MLD currently in issue are also affected when sold/redeemed after 1st April 2023. This date is not too far off and investors who hold such issues with a holding period of more than 12 months will rush to sell in the next 60 days, to lock into long term capital gain tax. This will push up the yields and depress the prices unduly.
Many may resort to make believe transactions with relatives/ friends only to buy back after a few days! The brokers may cheer with commission income unbudgeted!
The reasonable dispensation should be shelter/grandfather debentures already issued and bought by investors before 1st Feb 2023. In the absence of this, such investors who legitimately factored the tax rate in the investment decision would be unfairly hit by this move.
This Government has vowed not to amend laws retrospectively to the detriment of tax payers and has lived up to that promise so far. Why do damage to this image in an election year budget though not many MLD investors may vote!!
