What are Market-Linked Debentures (MLDs)?

Introduction

Market-Linked Debentures (MLDs) have become a popular investment option among high-net-worth investors looking for structured yield linked to market performance. Unlike traditional fixed-income instruments, MLDs are tied to the performance of an underlying asset such as equity indices, commodities, or interest rates.

However, the taxation of Market-Linked Debentures in India changed significantly after the Union Budget 2023. Earlier, MLDs enjoyed relatively favorable tax treatment compared to other debt instruments. 

With the new tax rules, investors now need to carefully understand how returns from these instruments are taxed.

This guide explains how MLDs work, the taxation rules before and after Budget 2023, how taxes are calculated on MLD investments, and whether Budget 2026 has brought any changes to MLD taxation.

What Are Market-Linked Debentures (MLDs)?

Market-linked Debentures (also MLDs) are a type of debt instrument whose yields are tied to an underlying market index or benchmark. Their returns are linked to the performance of a market index, hence known as Market-linked Debentures.

This underlying instrument can be the price (or yield) of a government security or any other basket of stocks. Consider them as a hybrid instrument that has no fixed returns but also relies on a market index. 

Key Features of MLDs include;

• Tenure - They come with a tenure of 12 to 60 months.
• Coupon rate - Here, the interest payments are not fixed. Instead, yield is receivable at maturity.
• Nature - Although MLDs are non-convertible debentures, they provide yields in par with the market indices.
• Minimum Amount - The minimum investment for MLDs usually starts from ₹1 lakh or more, depending on the issuer and product structure. 

Market-Linked Debentures Explained: How Do MLDs Work?

Market-linked debentures are debt instruments mimicking the performance of an underlying market index. It is similar to derivatives that are tied to an underlying asset. However, here, the yields depend on the performance of the index. For example, if the Sensex 50 is performing well on a particular date, the yield receivable on MLDs will also behave the same. 

Here is a simplified explanation of how they function:

Stage #1 - Investment is made in the debenture issued by a company or financial institution.

Stage #2 - The issuer invests the funds partly in fixed-income securities and partly in derivatives linked to a market index.

Stage #3 - At maturity, returns are determined based on the performance of the underlying benchmark.

Thus, if the 

• Benchmark index performs above a predefined level →  the investor may receive a higher yield
• Benchmark underperforms → yield may be lower or even zero, depending on the product structure.

Example of MLD

Let us understand with an example. 

Suppose ABC is a company that issues market-linked debentures with a 15-month maturity. So, considering the MLD does not lose its value (30%) by maturity, you will get the entire 10%. In short, if the Nifty 50 is above 20,000 points, you are eligible for the interest. At this point, if the index does underperform (below 20,000), you will only get the principal amount (initially invested in MLD). 

Now, the length of time you hold debentures brings specific tax implications applicable to MLDs. However, the tax treatment before and after 2023 differs.

[Note: The information, illustrations, and calculations provided in this blog are for general informational purposes only and should not be construed as investment advice or a recommendation.]

Taxation of Market-Linked Debentures in India: Before & After Budget 2026

The 2023 budget has changed the taxation of market-linked debentures in India. 

Taxation Before Budget 2023

Before the tax rule change, 

• MLDs were treated as listed securities for taxation purposes.
• If held for more than 12 months, gains were taxed as Long-Term Capital Gains (LTCG).
• LTCG on listed MLDs was taxed at 10% without indexation.

This made MLDs relatively tax-efficient compared to other debt instruments.

Taxation of MLD in 2026

In Budget 2023, the Finance Ministry announced Section 50AA, which brought significant changes to the taxation on MLD. 

Since then;

1. Uniform treatment - All gains from MLDs, irrespective of the holding period, are now classified as STCG and taxed at the investor's applicable income tax slab rate.​
2. Elimination of LTCG - Previously, the benefit of 10% LTCG for MLDs has now been removed.
3. Securities Transaction Tax (STT) - Such expenses, like STT initially paid by the investor, are not tax-deductible.
4. No Grandfather relaxation - As per the section, any market-linked debentures acquired before April 1, 2024, are also subject to new laws. 

Likewise, even in the Union Budget 2026, the MLD taxation remains unchanged and follows the existing rules, applicable since the Budget 2023. 

How To Invest In MLDs?

Before investing, investors must complete the Know Your Customer (KYC) process and ensure their demat account is active. The debentures are then credited to the investor’s demat account once the investment is processed.

Investing in Market-Linked Debentures (MLDs) can be done through:

• Private Placements: Major MLDs are issued via private placements and are typically available to HNIs, UHNIs, and institutional investors through wealth managers, brokers, or financial institutions.
• Financial Institutions: Many banks, brokerage houses, and wealth management platforms offer access to MLD issuances. Investors can subscribe to these debentures through their demat and trading accounts after completing the necessary documentation and investment formalities.
• Stock Exchanges: Some MLDs are listed on exchanges like NSE or BSE, allowing investors to buy them through a demat and trading account. 

Exit and Liquidity of MLDs

MLDs are usually issued for fixed tenures ranging from 12 to 60 months. While they may be listed on stock exchanges, liquidity in the secondary market can sometimes be limited.

For instance:

• Some MLDs may allow early exit through the secondary market, but finding buyers may not always be easy.
• Early exit may also impact the expected yield, depending on market conditions.

Understanding the liquidity aspect is important because it can affect both returns and investment flexibility.

Benefits And Risks Associated With MLDs

With the MLDs, there are certain benefits and risks associated, like;

Benefits of Market-linked Debentures

• Portfolio Diversification

This basket of MLD comprises various underlying assets, including stocks, indices, and commodities. As a result, there is good diversification that enables chances for higher yields. 

• Capital Protection

Unlike equity instruments, there is always a risk of losing the investment. However, this is not the case for the MLD. Here, you still receive the principal amount back (in some types), thus avoiding any capital erosion. 

• Potential for Yields 

Now that these debentures are following the market index, the yield rate is also high. It provides more interest as compared to traditional debt instruments. 

Risks of MLDs 

• Market risk 

Since the instrument is closely related to the index, poor market performance will affect the MLD investment as well. 

• Liquidity risk 

As they come with a maturity date, MLDs are not easily redeemable. Hence, the risk of liquidity brings in challenges when you want to exit early. 

• Credit risk 

Technically, MLDs are a source of borrowing for a company. If the company does not perform well, there is an equal chance of losing the initial investment as well. Thus, proper evaluation and analysis of the company are essential.

• Tax Changes

Following the 2023 amendments, the tax option for holding these debentures for more than 12 months has been eliminated. All gains are now treated as short-term capital gains (STCG) and are taxable at the investor's income slab rate. 

Conclusion

Market-linked debentures are a unique blend of fixed-income and market-linked yields. As a result, MLDs have the potential to outperform traditional debt instruments. While they offer multiple benefits, such as capital protection and diversification, they also carry an equal risk of market and liquidity fluctuations. So, whether holding them for a short or long period, it is crucial to consider the taxation on MLD laid out in the 2023 Budget.