Capital Gains on Transfer of Market-Linked Debentures, Specified Mutual Funds, or Unlisted Bonds/Debentures
Introduction:
Gains from the transfer, redemption, or maturity of specified mutual funds (SMFs), market-linked debentures (MLDs), and unlisted bonds or debentures are treated as short-term capital gains and taxed at the assessee’s applicable rates. [Section 50AA]
Scope of Section 50AA:
Applicable to gains from:
- Market-linked debentures (MLDs).
- Specified mutual funds (SMFs).
- Unlisted bonds or debentures, if transferred, redeemed, or matured on or after 23 July 2024
Key Definitions:
- Market-Linked Debentures (MLDs): Security which has an underlying principle component in the form of debt security and where the returns are linked to the market returns on other underlying securities or indices and includes any security classified or regulated as an MLD by the SEBI.
- Specified Mutual Funds (SMFs):
- Up to AY 2025-26: Mutual fund with not more than 35% of its total proceeds invested in equity shares of domestic company.
- From AY 2026-27:
- Mutual fund investing more than 65% of its total proceeds in debt and money market instruments; or
- Fund investing 65% or more of its total proceeds in units of a fund covered under (a).
- Unlisted Bonds/Debentures: Bonds and debentures are debt instruments issued by entities to raise capital for long-term financing, typically offering a fixed rate of interest to investors.
Computation of Capital Gains:
Gains are computed as:
Full value of consideration – Cost of acquisition – Expenses on transfer.
Note: No deduction shall be allowed in respect of any sum paid on account of Securities Transaction Tax.
- Type of Capital Gain and Tax Rates:
Gains from MLDs, SMFs, or unlisted bonds/debentures on transfer, redemption, or maturity are always taxed as short-term capital gains at the assessee’s applicable rate without any concessional rate benefit.