Income Tax 2025

Appearance

Special provision for computation of capital gains in case of Market Linked Debenture. ​

76(1) ​

Irrespective of anything contained in section 2(101) or section 72, the gains on the transfer or redemption or maturity, of a capital asset as mentioned in sub-section (2) shall be treated as short-term capital gains and shall be computed as per sub-section (3).

76(2) ​

For the purposes of sub-section (1), the capital asset shall be—

  • (a) a unit of a Specified Mutual Fund acquired on or after 1st April, 2023 or a Market Linked Debenture; or
  • (b) an unlisted bond or an unlisted debenture which is transferred or redeemed or matures on or after the 23rd July, 2024.

76(3) ​

For the purposes of sub-section (1), the short-term capital gains shall be computed as per the following formula:–– X = A – B – C, where,–– X = short-term capital gains; A = full value of consideration received or accruing as a result of the transfer or redemption or maturity of the debenture or unit or bond; B = the cost of acquisition of the debenture or unit or bond; and C = the expenditure incurred wholly and exclusively for such transfer or redemption or maturity.

76(4) ​

No deduction shall be allowed for any sum paid as securities transaction tax as per Chapter VII of the Finance (No. 2) Act, 2004.

76(5) ​

In this section,—

  • (a) “Market Linked Debenture” means a security, by whatever name called, which has an underlying principal component in the form of a debt security and where the returns are linked to market returns on other underlying securities or indices, and include any security classified or regulated as a market linked debenture by the Securities and Exchange Board of India; and
  • (b) “Specified Mutual Fund” means a Mutual Fund, by whatever name called, which invests more than 65% of its total proceeds in debt and money market instruments or a fund which invests 65% or more of its total proceeds in units of such Mutual Fund, subject to the following:–– (i) the percentage of investment in debt and money market instruments or in units of a fund shall be computed with reference to the annual average of the daily closing figures; (ii) “debt and money market instruments” shall include any securities, by whatever name called, classified or regulated as debt and money market instruments by the Securities and Exchange Board of India.
Explanation

Section Summary: ​

This section introduces special provisions for calculating capital gains on specific financial instruments, namely Market Linked Debentures (MLDs), units of Specified Mutual Funds, and certain unlisted bonds or debentures. It mandates that gains from the transfer, redemption, or maturity of these assets be treated as short-term capital gains (STCG), regardless of the holding period. This is a departure from the general rule where capital gains are classified as short-term or long-term based on the holding period.

Key Changes: ​

  1. Classification of Gains: Gains from MLDs, Specified Mutual Funds, and certain unlisted bonds/debentures are now treated as short-term capital gains, irrespective of the holding period. Previously, such gains could have been classified as long-term capital gains (LTCG) if the holding period exceeded the prescribed threshold (e.g., 36 months for debt instruments).
  2. Exclusion of Securities Transaction Tax (STT): No deduction is allowed for STT paid on these transactions, which was previously deductible under certain conditions.
  3. New Definitions: Introduces definitions for "Market Linked Debenture" and "Specified Mutual Fund," clarifying the scope of assets covered under this section.

Practical Implications: ​

  1. Taxpayers: Investors in MLDs, Specified Mutual Funds, or unlisted bonds/debentures will now face higher tax liability, as STCG is taxed at the applicable slab rate (up to 30% for individuals), compared to LTCG, which may have been taxed at a lower rate (e.g., 20% with indexation).
  2. Businesses: Financial institutions and mutual funds issuing these instruments may see reduced demand, as the tax treatment becomes less favorable for investors.
  3. Compliance: Taxpayers must ensure accurate computation of gains using the prescribed formula and maintain proper documentation of acquisition costs and transaction expenses.

Critical Concepts: ​

  1. Market Linked Debenture (MLD): A debt security where returns are linked to market performance (e.g., equity indices or other securities). It combines features of debt and equity instruments.
  2. Specified Mutual Fund: A mutual fund that invests at least 65% of its total proceeds in debt and money market instruments or in units of such funds.
  3. Formula for STCG Calculation:
    • X = A – B – C
      • X: Short-term capital gains.
      • A: Full value of consideration received (sale/redemption/maturity proceeds).
      • B: Cost of acquisition (purchase price).
      • C: Expenditure incurred for transfer/redemption/maturity (e.g., brokerage fees).

Compliance Steps: ​

  1. Documentation: Maintain records of purchase price (B), sale/redemption proceeds (A), and transaction-related expenses (C).
  2. Reporting: Report the computed STCG in the income tax return under the appropriate head.
  3. Exclusion of STT: Ensure that STT paid is not claimed as a deduction while computing gains.

Examples: ​

  1. Scenario 1: An investor purchases a Market Linked Debenture for ₹1,00,000 (B) and sells it after 2 years for ₹1,50,000 (A), incurring ₹5,000 in brokerage fees (C). The STCG is calculated as:

    • X = 1,50,000 – 1,00,000 – 5,000 = ₹45,000.
    • This ₹45,000 will be taxed as short-term capital gains at the applicable slab rate.

  2. Scenario 2: An investor redeems units of a Specified Mutual Fund after 5 years. The redemption amount is ₹2,00,000 (A), the purchase price was ₹1,20,000 (B), and transaction costs were ₹3,000 (C). The STCG is:

    • X = 2,00,000 – 1,20,000 – 3,000 = ₹77,000.
    • Despite the 5-year holding period, the gain is treated as STCG and taxed accordingly.

This section ensures that gains from these instruments are taxed uniformly as STCG, simplifying the tax treatment but potentially increasing the tax burden for investors.