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Tata Capital > Blog > Market-Linked Debentures (MLDs): Meaning, types, features, and taxation

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Market-Linked Debentures (MLDs): Meaning, types, features, and taxation

Market-Linked Debentures (MLDs): Meaning, types, features, and taxation

MLDs or market-linked debentures seem to be the hot favorite of the braver breed of investors trying to step outside the cozy fixed-income circuit. They are hybrid instruments that combine elements of capital market participation with features of traditional debt-like structures. It makes them attractive to investors who are seeking performance correlated to the market, yet want safety to some extent. But MLDs can be confusing if you’re hearing about them for the first time. This guide breaks the concept down so that you can determine if they have a place in your investment portfolio.

What are market-linked debentures (MLD)?

MLDs are debt instruments where the final return depends on how a specific market index or benchmark performs. Unlike fixed deposits or traditional bonds, MLDs don’t offer assured interest. Instead, returns are correlated to indices like equity markets, government bonds, or commodity indices such as gold. They normally have a maturity between 1 and 5 years. They then receive their original capital back at the end of the term, along with any returns linked to market performance.

Key terms related to market-linked debentures

Before proceeding, you must understand each term associated with MLDs.

  1. Issuer: The organization that issues the MLD, most commonly NBFCs or corporates.
  2. Base index: The index to which returns are linked (e.g., NIFTY, G-Sec).
  3. Payoff structure: Specifies how returns are quantified in terms of index movement.
  4. Capital protection: If the principal is guaranteed.
  5. Credit rating: Rating assigned to the risk by a rating agency (CRISIL, ICRA, etc).
  6. Secured and unsecured: Secured debentures are those backed by an asset or physical plant of the issuer (also called a mortgage debenture), while unsecured (or naked) debentures are not backed by any specific security.
  7. Listed vs. Unlisted: How much it can or cannot be traded on public stock exchanges.

Types of market-linked debentures

  1. Capital-protected MLDs
  2. Ensure the original amount (principal) is returned, regardless of market movement.
  3. Provides little to no returns when the underlying index underperforms.
  4. Suitable for conservative investors seeking downside protection.
  5. Non-capital-protected MLDs
  6. Carry a higher risk as the principal is not guaranteed.
  7. Greater return potential if the reference index is strong.
  8. Appropriate for aggressive investors willing to accept volatility.

Additionally, MLDs can be:

  • Listed / Unlisted (as the case may be on the secondary market)
  • Secured (Backed by collateral) or unsecured (higher default risk)

Features of market-linked debentures

  • The minimum investment is generally Rs. 10-25 lakh according to SEBI.
  • Agencies assign credit ratings to indicate the likelihood that a borrower might default on their financial obligations.
  • Returns are not paid out until maturity.
  • Liquidity differs: While listed MLDs can be sold before maturity, unlisted ones may provide for buyback.
  • Customization is common: These are often structured products designed to suit specific client needs.

How does a market-linked debenture work?

MLDs combine debt and market exposure in a structured format. Here’s a simplified flow:

  1. You can invest in the MLDs up to a predefined period (e.g., 3 years).
  2. The return is linked to an index, such as NIFTY 50.
  3. A fixed return is paid out if the index crosses a specified performance threshold.

If the index performs poorly:

  • In capital-protected MLDs, only the principal is returned.
  • In non-protected MLDs, the investor may incur a loss.
  • Payout happens at maturity — you get your principal + market-linked return (if applicable).

Advantages and risks of investing in market-linked debentures

FeatureAdvantagesRisks
Return PotentialHigher than FDs or traditional bondsNot fixed; depends on index
Capital ProtectionAvailable in some variantsAbsent in high-yield options
TaxationAs per the investor’s tax slabSubject to regulatory changes
LiquidityListed MLDs tradableUnlisted may be illiquid
RiskCustomizable to investor typeCredit and market risk apply

MLD vs NCD: Key differences

FeatureMLD (Market-Linked Debenture)NCD (Non-Convertible Debenture
Return natureReturns depend on market performanceFixed interest payout
Risk levelMarket and credit riskMostly credit risk
Capital protectionAvailable in structured productsNo such feature
TaxationShort-term capital gains are taxed as per the investor’s tax slabTaxed as per the slab or 20% with indexation after 3 years

MLD taxation rules as per the latest Indian budget

The returns from Market-Linked Debentures (MLDs) depend on market performance. For tax purposes, MLDs are treated as specified debt securities. The gains you earn from selling or redeeming MLDs are taxed as short-term capital gains, no matter how long you hold them. This rule was introduced in the Finance Act 2023, and remains unchanged even after the announcement of the Union Budget on 1 February, 2026.

As returns are treated as short-term gains, the profit is added to your total income and taxed according to your income-tax slab rate. This means there is no special lower tax rate and no long-term capital-gains benefit for MLDs. Indexation benefit is also not available.

If MLDs are listed and sold on an exchange, the tax treatment remains the same. Any interest received during holding is also taxed at your slab rate. Investors should keep proper records of purchase price, sale price, and dates to report gains correctly on their income tax return.

Why invest in MLDs?

Here are a few reasons MLDs are gaining attention:

  • Customized structures to match different return expectations
  • Tax-friendly: MLDs being listed held for over 1 year are taxed at 10% (according to the earlier law)
  • Capital protection (in select variants) gives peace of mind
  • Diversification beyond equity mutual funds or FDs
  • No TDS deducted on maturity if held in demat form

Regulatory framework and SEBI guidelines for MLDs

Market-Linked Debentures (MLDs) are regulated by SEBI under the rules for non-convertible and structured debt securities. The issuers must meet eligibility conditions. For instance, they must have adequate net worth. They must also disclose material information in offer documents. They must provide a credit rating, risk factors, and scenario analysis showing how returns may change in different market conditions.

SEBI also requires valuation by an independent agency and proper listing or disclosure with stock exchanges. Intermediaries selling MLDs must explain risks, while ensuring that the product matches the investor’s profile.

Overall, the framework focuses on transparency, investor protection, and clear disclosure of risks and returns before investing in MLDs.

How to buy market-linked debentures in India?

You can buy market-linked debentures in India by following the steps mentioned below:

  1. Open a Demat account: You need a Demat and trading account with a broker or bank to hold MLDs in electronic form.
  2. Check new issues: MLDs are usually bought during primary issues from banks or NBFCs through your broker or wealth advisor.
  3. Review details: Read the offer document, returns structure, risk factors, and credit rating before investing.
  4. Invest through exchange or private placement: Some listed MLDs can be bought on stock exchanges or via private offers.

List of popular benchmarks and indices for MLDs

The returns from your MLD investment depend on the performance of benchmarks and indices. Here are the popular ones you should monitor:

  • Nifty 50: It tracks top Indian companies and is often used for equity-linked MLD returns.
  • Sensex: This is another major stock index used to measure market performance.
  • Bank Nifty: It focuses on banking stocks and sector-linked MLDs.
  • Gold or commodity indices: Used for commodity-linked MLD structures.
  • Global indices (S&P 500, Nasdaq): Some MLDs link returns to international markets.

Conclusion

MLDs are not your everyday debt product. They want market-related performance and structural details to be disclosed. For sophisticated investors with an ample craving for risk and long-term goals, they can be a smart portfolio add-on. But given that the deal can become a little complicated and tailored, it is not such a bad idea to have a word with your trusted financial adviser and the experts at Tata Capital Wealth before you take the leap. It is their advice that can assist you in choosing MLDs that are commensurate with your return objectives and risk tolerance.

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FAQs

Who should invest in Market Linked Debentures?

  1. HNWI, looking for a tax-efficient fixed income alternative.
  1. Market participants seeking exposure with limited upside and downside.
  2. Those comfortable locking in capital for 1–5 years.
  3. Those in higher tax slabs, aiming to earn better post-tax gains than traditional FDs or debt funds.

Who can issue market linked debentures?

Corporates, especially NBFCs, may issue market-linked debentures to raise funds through structured debt instruments.

What is the minimum amount to invest in MLD?

The minimum investment in MLDs usually ranges from ₹10- ₹25 lakhs based on the issuer and the structure.

What is the holding period for market-linked debenture?

The time frame for market-linked debentures is typically 1-5 years, determined by the issuer and disclosed in the offering document.

How are the returns on market linked debentures taxed?

All listed MLDs held for more than 1 year attract a tax of 10% long term capital gains. But there is already a precedent for changing taxation rules in response to regulatory updates, so investors should read the latest guidelines before they invest.

What underlying indices are associated with the MLDs?

MLDs can be linked to various underlying indices such as equity indices (e.g., NIFTY 50, Sensex), government securities (G-Sec) yields, interest rate benchmarks, or even commodity indices like gold—depending on the product structure.

Where can I purchase MLDs?

MLDs can be bought from registered financial advisors, wealth management platforms, or directly from issuers, such as NBFCs and investment companies— usually through private placements or brokers in case of listed securities on the stock exchanges.

Who can invest in market-linked debentures in India?

Resident individuals, HUFs, companies, and other eligible investors in India can invest in MLDs. Most issues are targeted at high-net-worth investors. You need a Demat account to start. Generally, an MLD investment must be made through banks, brokers, or wealth advisors.

How are MLDs taxed in India after the latest changes?

The gains from MLDs are taxed as short-term capital gains. The profit is added to your total income and taxed at your normal income-tax slab rate, regardless of holding period. No long-term capital-gains benefit or indexation is available on these investments.

What is the full form of MLD in finance?

MLD’s full form in finance is Market-Linked Debenture. It is a type of debt instrument that banks or NBFCs issue. The returns are linked to the performance of a market index, stock, commodity, or other benchmark instead of offering a fixed interest rate.

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