Is Section 50AA Applicable to MLDs?

1. Introduction

Section 50AA of the Income-tax Act, 1961, was introduced through the Finance Act, 2023, and is effective from Assessment Year 2024–25. It specifically governs the taxation of gains arising from the transfer or redemption of Market Linked Debentures (MLDs).

2. Applicability of Section 50AA to MLDs

Section 50AA deems all gains from the sale or redemption of MLDs as short-term capital gains (STCG), irrespective of the holding period. These gains are to be taxed at the applicable rates based on the taxpayer’s profile—either the standard slab rate or a specified special rate.

This treatment overrides the general principle that capital gains are classified as long-term or short-term based on the period of holding.

3. Availability of Exemptions Under Sections 54EC and 54F

A critical question arises: Can taxpayers still claim exemptions under Section 54EC or 54F in respect of MLDs?

The intuitive response might be no, as Section 50AA deems the gains to be short-term. However, jurisprudence suggests a more nuanced interpretation.

In CIT v. ACE Builders Pvt. Ltd. [2005] 144 Taxman 855 (Bom), the Bombay High Court held that the deeming fiction under Section 50 (related to depreciable assets) is limited to the computation of capital gains and does not affect the actual nature of the asset for the purpose of claiming exemptions. Since the asset was held for over 36 months, it was treated as a long-term capital asset, and exemption under Section 54E (now Section 54EC) was allowed despite the gains being deemed short-term.

This precedent could potentially apply to Section 50AA as well, considering the similar structure and language.

4. Conclusion

While Section 50AA clearly mandates short-term capital gain treatment for MLDs, its impact on exemption eligibility under Sections 54EC and 54F remains unsettled. Given that the wording closely mirrors Section 50, the judicial reasoning in ACE Builders may influence future interpretations. However, no judicial or CBDT clarification currently exists on this point, so taxpayers and advisors must proceed cautiously until further guidance emerges.