Archive / Investment Adviser (Level 2) / Taxation of Debt Products
nism-series-xb-market-linked-debentures-section-50aa[ INVESTMENT ADVISER (LEVEL 2) ]
An investor acquired Market Linked Debentures (MLDs) in FY 2021-22 and redeems them in FY 2024-25. As per Section 50AA of the Income-tax Act (NISM Series X-B Chapter 10), how is the resulting capital gain taxed?
[ A ]As a short-term capital gain at applicable rates, irrespective of the period of holding, since Section 50AA applies to MLDs redeemed on or after 01-04-2023 even if acquired earlier[ CORRECT ]
[ B ]As a long-term capital gain at 12.5% without indexation, since the MLD was held for more than 12 months
[ C ]As a short-term capital gain, but only because the MLD was acquired after 01-04-2023; MLDs acquired earlier retain long-term treatment
[ D ]As exempt income, since the MLD is a principal-protected debt instrument
Takeaway
Option A is correct: Section 50AA taxes capital gains from the transfer, redemption or maturity of MLDs as short-term capital gains irrespective of the holding period, and applies to MLDs redeemed on or after 01-04-2023 even if acquired before that date.
Derivation
NISM X-B Section 10.5.1 states that MLDs transferred, redeemed or matured on or after 01-04-2023 are subject to Section 50AA, which overrides the usual long-term/short-term classification, and no cost of improvement is permitted. A frequent error is testing the 01-04-2023 cut-off against the acquisition date instead of the transfer/redemption/maturity date, or assuming a holding period beyond 12 months earns long-term treatment.
Why the others fail
B — As a long-term capital gain at 12.5% without indexation, since the MLD was held for more than 12 months
Section 50AA overrides the normal holding-period rule for MLDs; gains are always treated as short-term, regardless of how long the MLD was actually held.
C — As a short-term capital gain, but only because the MLD was acquired after 01-04-2023; MLDs acquired earlier retain long-term treatment
Section 50AA applies based on the date of transfer, redemption or maturity, not the date of acquisition; it covers MLDs redeemed on or after 01-04-2023 even if acquired before that date.
D — As exempt income, since the MLD is a principal-protected debt instrument
The book provides no exemption for principal-protected MLDs; Section 50AA taxes gains from both principal-protected and non-protected MLDs as short-term capital gains.