Getting MLD at a premium? TDS will reduce your return

“Do I owe any tax on the profit?” This is what you would have wanted to know right away.

“There is capital gains tax at the applicable slab rate, which is 20% in your case. But, even after paying taxes, you only pay 2.6% on your investment in three months!” informs RM.

“What is this product?”

“It is an MLD or market linked debenture. It was one of the favorite loan products of High Net-Worth Individuals (HNIs) but has lost its sheen after the Budget announced capital gains tax at slab rates with effect from financial year 2024-25. But it is none of your business. In fact, you should use this opportunity to grab this sweet 2.6% offer. That’s a 10.4% annualized after-tax return!”

sounds like a good deal? Well, it definitely is. But, here’s what your RM won’t tell you. Issuer will deduct tax at source or TDS at 10% on total interest 2.6 lakhs. So, you have to part with it 26,000 from the maturity amount of 12.6 lakhs that was promised to you. This was an important announcement made in the budget – Listed bonds issued by a company will attract 10% TDS with effect from FY 2023-24. Earlier, only unlisted bonds were subject to TDS.

So, instead of 12.6 lakh maturity amount, you will get 12.34 lakhs at the time of redemption of debentures. Will also have to pay capital gains tax of 8,000 (20% 40,000). Of course, you can claim TDS back while filing your income tax return.

But, here’s the catch. full interest of 2.6 Lakhs and not only the profit that you have made as an intermediary buyer will be reflected in your Form 26AS. This may mean that the tax officer may deny the TDS refund, claiming that your tax statements show interest income and hence TDS is valid. In fact, the authority may ask for additional tax as per your tax slab.

If you are a retail investor and you are suddenly being offered MLDs as a good alternative to fixed income products, you must understand the TDS puzzle before signing up for the deal.

tds puzzle

The budget changed the taxation on MLD from 10% long-term capital gains tax (after one year of holding) to short-term capital gains (STCG) at slab rates, irrespective of the holding period. This will be applicable from April. HNIs and wealth managers are racing to sell their MLD holdings to retail buyers before March 31.

Some would argue that retail investors can negotiate a higher premium from HNIs to get a better deal. But, the levy of TDS on listed bonds will dilute the gains.

“The TDS expense for the intermediary buyer will be very high in proportion to the capital gain made by him. “He will pay TDS on his interest income as well as that of the first buyer,” says Firoz Aziz, deputy chief executive officer, Anand Rathi Private Wealth Management. In the above example, the TDS outgo is close to 80% of the capital gain. The shorter the holding period for the intermediary buyer, the higher the TDS deduction.

While the same can be claimed while filing ITR, the TDS amount will be locked in for a longer period, creating cash flow concerns for small investors.

He is not everything. Investors may see a slight increase in credit risk, says Aziz. “For a company that was able to raise capital using this route till now, raising funds will be a bit difficult,” he says.

Additionally, the taxpayer may face the hassle of tax notices while claiming TDS refund.

“Most likely there will be a tax notice as the nature of this transaction cannot be understood electronically. But, it can be easily resolved digitally and won’t lead to litigation,” says Karan Batra, founder, CharteredClub.com.

“Such tax notices are not a matter of concern, but a tax notice unwittingly puts stress on the taxpayers. We advise our customers not to get into such hassles if the benefits are not sufficient.”

When asked what a retail investor should do, Ashish Khaitan, Founder, Serenity Wealth, says, “Given the nuances around taxation, it is advised that investors consult their CA before taking any decision. Representations have been made by the industry bodies to the Finance Ministry and it is expected that there will be more clarity soon.”

Finance Industry Development Council (FIDC), a representative body of Non-Banking Finance Companies (NBFCs), in a white paper has recommended to the Finance Minister that since returns on MLD are now in the nature of STCG, they should not be taxed To be put The white paper states, “Withholding tax should ideally apply only to distributions of interest income—as is the case with regular bonds—to avoid any ambiguity.”