So as an NRI who has no other income in India other than my investments, I think MLDs are a great tool to help save on some tax while getting you better returns.
Given that we can’t make use of the basic exemption against capital gains and MLDs are taxed at slab rate, I would effectively pay no tax on them (slab rate 0) while capital gains would be (10-15%) while having exposure to the same Nifty index.
Furthermore, MLDs provide better downside protection incase of a bear market. Some even giving a base return fixed incase the market underperforms while some others don’t have this fixed base return but insure that your original capital gets back to you even if Nifty goes down.
For NRIs, the basic exemption is not available on capital gains from listed stocks and securities and the same will be taxable at a flat 10% in case of long-term and 15% in case of short-term gains.
Moreover, yes, listed MLDs will be taxed as per your slab rate irrespective of the holding period if purchased after 1st April 2023 and the basic exemption of ₹2.5L will be available on such gains.
MLDs are inherently more risky then index. Here you are not only taking equity risk, but also debt risk of some small NBFC, most likely rated AA or lower.
People get all excited reading guaranteed return but who is guaranteeing it? Most likely a small NBFC, which is actually struggling to borrow from normal channels of markets.
Personally, I don’t see value in taking this additional risk for saving 10%of capital gains.
Well there is also downside protection. Incase the underlying index goes below your initial investment - you get back your capital. So if you invest 100 rs and nifty goes down 10%, you still get back 100 rs. If this was a nifty etf you would get 90 rs.
Who is providing that protection? Or who is guaranteeing that?
Govt of India? State bank of India? Or some small NBFC rated A- which is anyways struggling to borrow money?
Think on those lines and probably you will get better idea of risk.
Having said that, if you are convinced this is suitable product for you, by all means, go for it
I mean, I won’t invest everything with one NBFC’s bonds. I would diversify for protection against such insolvencies.
Some wealth advisor I was speaking to told me HDFC also had MLDs, which is perhaps one of the safest private borrowers in the country. I would still not put my entire investment with them but I would definitely feel more comfortable.
