MLD: Meaning, Types and Taxation

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Market-linked debentures are debt securities linked to market performance.

 

This is why they enjoy equity taxation. If they are held for greater than one year, the investor is only charged 10% LTCG on the interest. This makes them tax efficient.

 

Debt instruments do not have the same risk as equity. They are not subject to as much uncertainty. If the benchmark chosen is low enough, you don’t take on as much risk.

 

That is because markets are more likely to stay above this benchmark, and you can still enjoy high returns.

 

Market Linked Covered Bonds and Regular Covered Bonds

mld-difference

Market linked covered bonds and regular covered bonds are not available everywhere. They generally require a large ticket size of one crore or more. That is why they are still niche and have low participation. However, this is changing nowadays.

 

These are now available at smaller ticket sizes as well.

 

Investors in the 30% bracket should primarily look at these because they stand to gain the most. Instead of being charged their slab rate, they pay LTCG at 10%, putting less of a dent in their income.

 

People who are interested in debt investments can also try these based on their risk appetite.

 

While investing your money in any asset, the first question that triggers in a person’s mind is how much after-tax net returns would they get?

 

The taxation of different investment instruments is done differently, such as capital gain on equity shares, mutual funds, etc., are taxable under capital gains.

 

At the same time, the interest income from bonds and debentures are taxed under other sources.  

 

This blog will help you gauge insights on how returns from Wint Wealth assets are taxed, the slab rates applicable for the current financial year 2021-22, and how you can plan your taxes 

So, let’s get started. 

How are Wint Wealth Assets Taxed? 

 

So far, Wint Wealth has issued two types of assets, which are Covered Market Linked Debentures (MLDs) and regular covered bonds. While we explain the tax implication of these two types of assets, we strongly recommend you to consult your Chartered Accountant to understand precisely how it will impact the taxation of your income. 

 

Here’s a brief about the tax returns on Wint MLD and Wint Wheels issued by Wint Wealth.

 

Market Linked Debentures (MLDs) 

In simple words, MLD is a combination of a debt product but has a flair for equity products, too. To put it differently, MLD offers you interest, but the interest earned depends on the performance of the index it is tracking. 

 

For example, you bought an MLD that offers 9% returns when NIFTY 50 stays above 5000.

 

The market link is the NIFTY 50 level staying above 5000, and hence, you will get an interest income of 9% only if NIFTY 50 is above 5000. Therefore, it offers interest like debt products but the market linkage is similar to an equity product. 

How are the Returns of Covered MLD Taxed? 

 

Usually, interest income earned is reported under the head, ‘Income from other sources’ of the Income Tax Return form. However, since MLDs have a market linkage, if the MLDs are held for more than 12 months (1 year), they are taxed under, ‘Income from Capital Gains.’ 

 

  • Taxation If Held For Less Than 12 MonthsIf MLDs are held for less than 12 months, the interest income earned during the holding period is reported under the head ‘Income from Other Sources’. Such income will be taxed at the applicable slab rate of the individual for that financial year in which the interest was earned.

 

  • Taxation If Held For More Than 12 MonthsIf MLDs are held for more than 12 months, then they falls under the category of capital gains. Hence, such gains are reported under the head ‘Income from Capital Gains’. Since it was held for more than 12 months, your long-term capital gain will be taxed at 10% of the gain made on the MLD. Any other income will be taxed as per your applicable slab rates.

 

Regular Covered Bonds 

 

These are covered bonds issued by the NBFC Wint Wealth picks for you to invest with.

 

Example, Wint Wheels offer a fixed interest income, payable monthly, quarterly or half-yearly, where you can earn interest from 9% to 11% p.a. 

 

  • Taxation of the Interest IncomeThe interest earned on Wint Wheels is taxed at a slab rate applicable to you, and the income is reported under, ‘Income from other sources’ of the Income Tax Return Form.Please remember, the deduction of INR 10,000 under section 80 TTA is not applicable for the interest earned on covered bonds as it is only deductible from the savings interest.

 

Understanding Tax Slabs 

 

The below slab rates are applicable for the income earned in the financial year 2021-22 and assessed in the assessment year 2022-23. 

 

  • Individuals (Below 60 Years of Age)

 

Net Income  Rate of Tax
Up to Rs. 2,50,000
Rs. 2,50,001 – Rs. 5,00,000 5%
Rs. 5,00,001 – Rs. 10,00,000 20%
Above Rs. 10,00,000   30%

 

  • Senior Citizens (Above 60 Years but Below 80 Years of Age )

 

Net Income  Rate of Tax
Up to Rs. 3,00,000
Rs. 3,00,001 – Rs. 5,00,000 5%
Rs. 5,00,001 – Rs. 10,00,000 20%
Above Rs. 10,00,000   30%

 

  • Super Senior Citizens (Above 80 Years of Age)

 

Net Income  Rate of Tax
Up to Rs. 5,00,000
Rs. 5,00,001 – Rs. 10,00,000 20%
Above Rs. 10,00,000   30%

 

Taxation – Employed Citizens

 

For example, an individual, Raj is 40 years old, is salaried and also has an interest income from Wint Wheels. His total income (salary and interest) is Rs. 7,20,000, and he invested Rs. 1,50,000 in the allowable deductions under section 80C.

 

His Net Income will be Rs. 5,70,000. 

 

As per the slab rate, he will pay 5% tax for the first 2,50,000 (5,00,000-2,50,000) and he will pay 20% on the balance amount of Rs. 70,000.   

Taxation – Unemployed Citizens

 

If you do not have any other source of income, other than returns from Wint assets, then net income up to Rs. 2,50,000 for individuals below 60 years in a financial year will not be chargeable to tax. 

 

However, if you have capital gain on Wint MLDs and do not have any other income, you will have to pay capital gain tax at 10% on the gain generated on MLDs. 

 

How Should You Plan Your Tax?

 

It will help you set off the Capital Gain against the Capital Loss, and you do not need to pay tax on the gain. Long-term losses and short-term losses are allowed to be set off against long-term capital gains. 

 

  • Utilize 100% of the allowable deductions under section 80C by investing in tax-saving products;
  • Exhaust other allowable deductions under section 80D, 80CCC, 80EE, 80G, etc., to save tax;
  • Pay advance taxes regularly to avoid unnecessary interest charges on the tax payable;

The Bottom Line 

 

If you understand the product before investing, you will buy it more confidently and understanding the product’s taxation is a big bonus. It will also offer you a window to plan your taxes. We once again request you to check with your CA about how these investments are taxed and how to prepare taxes to get the exact picture.  

 

Happy Winting!

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