Higher capital gains on market linked debentures

Market-Linked Debentures (MLD) are instruments that provide fixed returns to investors based on the performance of an underlying market index. MLDs are popular investment instruments for HNIs as they offer a stable rate of return with low risk (similar to loans), but unlike interest on loans, which are taxable at slab rates, 10% on gains on maturity of MLDs was taxed at a flat rate of Rs. As equity under section 112A of the Act (holding period exceeding 12 months).

It is proposed to insert a new section 50AA of the Act for taxation of MLD. Under this section, with effect from April 1, 2024, the full value of the consideration received or acquired as a result of transfer or redemption or maturity of such instruments shall be treated as short-term capital gain and shall be taxable at the applicable slab rates. It is to be noted that even if the MLD is received before April 1, 2024, the provisions of section 50AA of the Act will apply where the transfer or redemption or maturity occurs after April 1, 2024. Also, no deduction will be allowed. In computing the income chargeable to tax of any sum paid on account of securities transaction tax. However, the cost of acquisition of debentures and any other expenditure incurred wholly and exclusively in connection with such transfer/redemption/maturity shall be allowed as deduction.

The above amendments along with increase in rate of TCS (Tax Collected at Source) from 5% to 20% on foreign tour packages and other remittances under LRS will definitely increase the tax burden on HNIs. Looking at the recent amendments proposed in the last few budgets, there is a clear indication that the revenue authorities aim to withdraw all tax incentives applicable to HNIs and what they believe to be a fair and equitable tax from such individuals.