## Capital Gain on MLDs, Specified Mutual Funds & Unlisted Bonds/Debentures [Section 50AA]
Section 50AA creates a special regime for three categories of debt-oriented instruments. The gain is always Short-Term irrespective of period of holding.
### Key Definitions
- Market Linked Debenture (MLD): A security whose principal component is in the form of a debt security but whose returns are linked to market returns on other underlying securities (often equity indices). Despite the equity-linked returns, principal is debt.
- Specified Mutual Fund: A mutual fund in which more than 65% of its total proceeds is invested in debt instruments (i.e., debt-oriented funds).
### Tax Treatment
Capital gain on transfer/redemption of the following is deemed to be Short-Term Capital Gain (STCG) regardless of holding period:
1. Market Linked Debentures
2. Specified Mutual Fund units acquired on or after 1.4.2023
3. Unlisted Bonds or Debentures
### Why this special regime?
These instruments were earlier used for arbitrage — investors got equity-like returns with debt-fund / LTCG treatment (paying just 10% / 20% with indexation). To plug this loophole, Section 50AA mandates STCG taxation at slab rate, removing both indexation and concessional LTCG rates.
### Practical Impact
- No indexation benefit available
- No Section 54-series exemptions applicable (those generally need LTCG)
- Taxed at slab rate of the assessee — could be as high as 30% + surcharge