Market Linked Debentures

The difference between the buyback price and the issue price is considered as interest income for tax purposes As per Indian tax laws, interest income from debt instruments like debentrures is taxable as "Income from Other Sources" under the Income Tax Act, 1961. 

So, the gain (difference between buyback price and issue price)would be taxable as interest income at the applicable tax slab rate for the investor.

Correction: MLD gains aren't "interest", and the treatment depends on when they were bought.

• Sec 50AA (from 1 April 2023): gains on transfer, redemption or maturity of a market linked debenture are deemed short-term capital gains, taxed at slab rates, irrespective of holding period, with no indexation. A buy-back by the issuer before maturity is a "transfer or redemption", so it is covered.

• Gain = buy-back price minus cost of acquisition (issue price plus transfer costs).

• Also note: the Finance (No. 2) Act 2024 extended Sec 50AA to unlisted bonds and debentures transferred or redeemed on or after 23 July 2024.

• If the issuer pays periodic coupon-like amounts, those are interest (Other Sources). TDS under 194A may apply.

• Report the gain in Schedule CG under "STCG on Sec 50AA assets" in ITR-2/3.

For an individual investor, a buyback/redemption of a Market Linked Debenture (MLD) is generally treated as a transfer, and the gain is computed by comparing the buyback proceeds with the investor’s cost of acquisition—not automatically the debenture’s original issue price. If bought directly at issue and held as an investment, the difference is ordinarily a capital gain; a loss may be a capital loss, subject to the usual rules.

For transfers/redemptions on or after 23 July 2024, section 50AA treats gains on specified MLDs as short-term capital gains, irrespective of the holding period, taxable at the investor’s applicable rate. For an earlier buyback, the then-applicable rules must be considered; listed and unlisted debentures could receive different holding-period treatment. The result can also differ if the investor acquired the MLD in the secondary market, holds it as trading stock, or the transaction is legally structured as an issuer purchase rather than redemption.

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