Market linked debentures (MLDs) in India 2026: How they work, taxation under section 50AA, and who they suit

Introduction

Market Linked Debentures occupy an unusual space in India's fixed-income landscape they are classified as debt instruments but their returns are not fixed. Instead, returns depend on how a specific market index or benchmark performs over the tenure of the instrument. For investors who want debt-instrument structure with equity-like return potential, MLDs have historically been an interesting proposition.

However, the landscape for MLDs changed significantly in 2023. The Union Budget 2023 introduced Section 50AA of the Income-tax Act, which effectively eliminated the tax advantage that made MLDs particularly attractive to high-income investors. Budget 2026 left this treatment unchanged. Understanding what MLDs are, how they actually work, what the current tax treatment means for returns, and how they compare to standard NCDs is essential before evaluating them as an investment option.

Important note on the article title: We have not described MLDs as having "tax benefits" in this article because under current Section 50AA rules, MLDs do not carry a tax advantage over other debt instruments. All MLD gains are taxed at slab rate regardless of holding period. This is covered in detail in the taxation section below.

All content is educational and does not constitute investment advice.

What Are Market Linked Debentures (MLDs)?

A Market Linked Debenture (MLD) is a structured debt instrument issued by a company typically an NBFC, investment bank, or large corporate where the return to the investor is not a fixed coupon but is instead linked to the performance of an underlying market benchmark.

The benchmark can be a stock index (Nifty 50, Sensex), a commodity price (gold), government bond yields (10-year G-Sec yield), or another market reference. The issuer specifies the benchmark, the participation rate (what percentage of benchmark upside the investor receives), and any floor or cap on returns all in the offer document at the time of issuance.

MLDs are classified as Non-Convertible Securities under SEBI's NCS Regulations 2021. They are structured products more complex than standard NCDs and have historically been distributed primarily through private placement to HNIs, wealth management clients, and institutional investors.

How MLDs Work: The Two-Component Structure

When a company issues an MLD, the investment is conceptually divided into two components:

Component 1 — Debt (principal protection engine):

A large portion of the investment amount is placed in fixed-income securities — government bonds, high-grade NCDs, or similar instruments. The goal of this component is to ensure that by the end of the tenure, this portion grows back to the original face value. This is what enables the principal protection feature in a principal-protected MLD.

Component 2 — Derivative (market-linked return engine):

A smaller portion of the investment is used to purchase options or derivative contracts on the chosen benchmark. If the benchmark performs well, this component generates the market-linked upside. If the benchmark performs poorly, this component may generate zero return — but the debt component has protected the principal.

Simplified example:

An investor places Rs. 1,00,000 in a 3-year principal-protected MLD linked to the Nifty 50:

• Debt component: Rs. 86,000 invested in G-Secs at ~5% grows to Rs. 1,00,000 at maturity (protecting principal)

• Derivative component: Rs. 14,000 used to buy Nifty call options

If Nifty rises 40% over 3 years and the participation rate is 70%, the investor receives: Rs. 1,00,000 (principal) + Rs. 28,000 (70% of 40% on Rs. 1,00,000) = Rs. 1,28,000.

If Nifty falls, the investor receives only Rs. 1,00,000 (principal returned, derivative expired worthless).

How MLD Returns Are Calculated

MLD returns use a point-to-point method not an average. The return is calculated based on the value of the benchmark at the start of the tenure versus the value at the end of the tenure, multiplied by the participation rate.

Return formula:

MLD Return = Face Value × Participation Rate × MAX(0, (Final Benchmark Value Initial Benchmark Value) ÷ Initial Benchmark Value)

Example Nifty-linked MLD:

• Face value: Rs. 1,00,000

• Tenure: 3 years

• Benchmark: Nifty 50

• Participation rate: 75%

• Nifty at start: 22,000 | Nifty at end: 27,500 (25% gain)

• Market-linked return = Rs. 1,00,000 × 75% × 25% = Rs. 18,750

• Total payout at maturity = Rs. 1,00,000 (principal) + Rs. 18,750 = Rs. 1,18,750

If Nifty had fallen to 19,000 instead: Market-linked return = Rs. 0. Total payout = Rs. 1,00,000 (principal only, in a PP-MLD).

This point-to-point structure means interim market movements do not matter only the start and end values of the benchmark determine the payout.

MLD Regulation in India: SEBI Framework

MLDs are regulated by SEBI under the Non-Convertible Securities (NCS) Regulations, 2021. Key regulatory provisions:

• Credit rating mandatory: All MLD issuers must obtain a credit rating from a SEBI-registered agency

• Listing requirement: MLDs may be listed on NSE or BSE but are primarily distributed through private placement

• Valuation: SEBI has mandated that MLD valuation be conducted by an agency appointed by AMFI — ensuring standardised and independent mark-to-market pricing

• Minimum investment: Reduced from Rs. 10 lakh to Rs. 1 lakh to broaden retail access, though most issuances continue to be directed at HNIs

• Offer document disclosure: Issuers must specify the benchmark, participation rate, floor/cap on returns, and all conditions for return calculation in the offer document

How Are MLDs Taxed in India in 2026? Section 50AA Explained

This is the most important section for any investor evaluating MLDs in 2026. The tax treatment has changed fundamentally from what it was before April 2023 and this change significantly affects the post-tax attractiveness of MLDs for high-income investors.

Before April 1, 2023:

MLDs were treated as listed securities. If held for more than 12 months, gains were taxed as Long-Term Capital Gains (LTCG) at 10% without indexation a significant tax advantage over regular debt instruments, where income was taxed at full slab rate.

After April 1, 2023 - Section 50AA:

The Union Budget 2023 introduced Section 50AA of the Income-tax Act, which specifies that all gains from MLDs are treated as Short-Term Capital Gains regardless of the holding period. These gains are taxed at the investor's applicable income tax slab rate. There is no LTCG benefit, no indexation benefit, and no 10% concessional rate even if the MLD is held for 3, 5, or any number of years.

Budget 2026: No changes to MLD taxation were announced. Section 50AA treatment remains in force.

What this means practically: For an investor in the 30% tax bracket, MLDs no longer offer any tax advantage over a regular NCD or fixed deposit. The primary rationale for HNI investment in MLDs the 10% LTCG rate has been eliminated. MLDs must now be evaluated purely on their return potential and risk profile, without any tax arbitrage benefit.

For a complete guide to bond taxation, refer to Taxation on Bonds in India: Comprehensive Guide.

How to Invest in MLDs in India

Unlike regular NCDs which are publicly issued and available to all retail investors via ASBA or UPI, most MLDs in India are distributed through private placement:

Through wealth managers and private banking: Most MLDs are placed with HNI clients through private banking relationships at major banks (HDFC Private, ICICI Private, Kotak Private) or wealth management firms. Issuers include Edelweiss, Nuvama, IIFL Finance, JM Financial, and similar entities.

Through registered brokers: Some brokers and their wealth advisory arms offer MLD products to eligible clients who meet the minimum investment threshold.

Through the issuer's distribution network: Companies issuing MLDs may distribute directly through their own registered investment adviser or distribution channels.

KYC requirement: Before investing in an MLD, investors must complete KYC with the distributor, submit identification and address documents, and for private placement often confirm their status as a non-retail investor or HNI.

What to check in the offer document: Benchmark used, participation rate, floor (minimum return) and cap (maximum return) if any, exact formula for return calculation, credit rating of the issuer, and whether the instrument is principal-protected or not.

Who Are MLDs Suitable For?

Given the Section 50AA tax change, the investor profile for MLDs has shifted:

MLDs may be worth evaluating for:

• Investors who want equity-market exposure with principal protection and cannot tolerate equity volatility

• Investors in lower tax brackets (below 20%) where the slab-rate taxation on STCG is not significantly punitive

• Portfolio diversification accessing a structured return profile not available through standard bonds or mutual funds

• Investors with a defined view on a specific market index or commodity over a 1–5 year horizon

MLDs are less suitable for:

• Investors in the 30% tax bracket who previously invested in MLDs specifically for the 10% LTCG advantage — that advantage no longer exists

• Investors who need periodic income MLDs pay no coupon during the tenure

• Retail investors who need liquidity most MLDs are illiquid until maturity

• Investors who want certainty of return MLD returns are genuinely uncertain and can be zero in a principal-protected structure if the benchmark underperforms

For fixed-income investors seeking predictable income with capital protection, standard NCDs with contractually defined coupons and face value at maturity remain the relevant instrument. To explore listed bonds and NCDs available in India, visit bondscanner.com/bonds. For a comparison of NCD interest rates and issuers, refer to NCD Interest Rates in India 2026: How They're Set and What to Look For.

Key Risks of Investing in MLDs

• Market risk: The return on the linked component is genuinely uncertain. Even in a principal-protected MLD, the investor can receive zero market-linked return if the benchmark is flat or negative at maturity — recovering only the principal.

• Credit risk: MLDs are obligations of the issuing company. If the issuer defaults, both the principal (in PP-MLDs) and any accumulated return are at risk. The credit rating of the issuer — not the benchmark — is the primary credit risk indicator.

• Liquidity risk: Most MLDs have no active secondary market. Unlike listed NCDs which trade on NSE and BSE, MLD exits before maturity typically require finding a buyer through the distributor's network, often at a significant discount to fair value.

• Complexity risk: The return formula — benchmark, participation rate, observation dates, floor, cap — is specific to each MLD and requires careful reading. Investors who do not fully understand the formula may be surprised by the actual return at maturity.

• Tax risk (realised): The removal of LTCG treatment through Section 50AA has already been realised — this is not a future risk but a present reality. Investors who hold older MLDs purchased before April 2023 are now also subject to Section 50AA — there is no grandfathering.

FAQs

What are Market Linked Debentures (MLDs) in India?

An MLD is a structured debt instrument whose return is not a fixed coupon but is linked to the performance of a market benchmark such as the Nifty 50, gold prices, or G-Sec yields. Regulated by SEBI under NCS Regulations 2021, MLDs are primarily issued through private placement to HNIs and institutional investors.

How are MLDs taxed in India in 2026?

Under Section 50AA, all gains from MLDs are treated as Short-Term Capital Gains and taxed at the investor's applicable slab rate regardless of holding period. There is no LTCG benefit, no 10% flat rate, and no indexation. Budget 2026 did not change this treatment.

What is the difference between principal-protected and non-principal-protected MLDs?

A principal-protected MLD guarantees return of the original investment at maturity regardless of benchmark performance. A non-principal-protected MLD does not guarantee principal if the benchmark underperforms, the investor may receive less than invested.

What is the minimum investment in MLDs in India?

The minimum was reduced from Rs. 10 lakh to Rs. 1 lakh. However, most MLD distributions continue to be directed at HNIs through private placement rather than public issues.

Do MLDs pay regular interest like NCDs?

No. MLDs typically do not pay periodic coupons. All returns both principal and market-linked gain are paid as a single lump sum at maturity.

Can I sell an MLD before maturity?

Liquidity for MLDs is significantly lower than for listed NCDs. Most MLDs have no active secondary market. Exit before maturity typically requires finding a buyer through the distributor and may result in a significant discount to fair value.

How are MLDs different from regular NCDs?

Regular NCDs pay a fixed coupon and return face value at maturity returns are certain. MLD returns are variable, linked to a benchmark, and paid entirely at maturity with no periodic income. Under current Section 50AA rules, both are taxed at slab rate, eliminating the previous tax advantage of MLDs.

This article is published by BondScanner, a SEBI-registered Online Bond Platform Provider (OBPP). Links to BondScanner's bond listing page, Android app, and iOS app referenced in this article are for informational purposes only.

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Disclaimer

This blog is intended solely for educational and informational purposes. The instruments, issuer categories, yield ranges, and examples mentioned herein are illustrative and should not be construed as investment advice or recommendations.

BondScanner is a SEBI-registered OBPP and does not provide personalized investment advice. Nothing in this article is a solicitation to buy or sell any security.