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section 10(38)

Exemptions under section 10(38) on Long-Term Capital Gains

Last Update Date : August 11, 2018

section 10(38)

Now-a-days, every individual invests in securities of their choice for long periods of time to gain future benefits. Investments are always good, eventhough its a little risky because they give good returns at the end. This guide will cover the tax benefits available under section 10(38) to the investors.

What is Section 10(38)?

This section talks about the long-term capital gains obtained after the sale/transfer of securities that are not chargeable to tax under the Income Tax Act.  First let us understand what are long term capital gains.  A capital investment, such as equity shares, that has been invested for more than 12 months is called Long-Term capital investment . Long -term capital gain/loss is the profit/loss occurred at the time or selling or transferring of the securities. The difference amount of the selling value and the purchasing value is either a gain or a loss.

Conditions to be Satisfied for Tax Exemption

As per the Income Tax rules, tax can be exempted provided the assets are invested in:

  1. Equity shares of a company,
  2. Units of equity oriented mutual funds (Equity oriented mutual funds are the funds invested in equity shares of companies under recognised stock exchange holding more than 65% of total funds.)
  3. Units of business trust.
    • The transfer of equity shares or units of equity oriented from mutual funds or units of a business trust should be liable to Securities Transaction Tax (STT).
    • These shares should fall under Long-term capital assets.
    • The transfer of shares should have happened on or after 1st October 2004.
    • The equity shares purchased or sold should be of existing listed under a recognised stock exchange.

What is Securities Transaction Tax?

Securities Transaction Tax(STT) was recently introduced by the Income Tax Department to avoid tax on capital gains. STT is paid both at the time of purchase of shares and at the time of sale of shares. STT gets added to the price of stock at the time of transaction. STT is levied only on the securities that are listed under recognised Indian stock exchange.

Exemptions from LTCG under section 10(38) can be available even if STT on the transactions are not paid, when;

  • The securities are purchased or sold under any recognised stock exchange internationally i.e. International Financial Centre.
  • The transaction must be done through foreign currency.

Exclusions to the Clause

Clause (a) Clause (b)
Obtaining the assets approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India in this behalf. Obtained through an issue of shares by a company other than the issue referred to in clause (a).
In accordance with Foreign direct investments guidelines issued by the Govt. of India, assets obtained by any non-resident are excluded. Assets acquired by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business.
A venture capital fund referred to in section 10(23FB) of the Act or a Qualified Institutional Buyer or assets acquired by an investment fund being a Category I or a Category II Alternate Investment Fund are excluded. Acquisition which has been approved by the Supreme Court, High Courts, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India in this behalf.
Acquisition of assets through preferential issue to which the provisions of chapter VII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 do not apply are excluded. Acquisition under employee stock option scheme or employee stock purchase scheme framed under the SEBI Guidelines, 1999.
In accordance with foreign direct investment guidelines of the Government of India assets acquired by any non-resident are excluded.
Acquisition of shares of company made under SEBI Regulation, 2011.
Capital Assets acquired from the government
Acquisition by an investment fund being a Category I or a Category II Alternate Investment Fund or a venture capital fund referred to in section 10(23FB) of the Act or a Qualified Institutional Buyer;
Acquisition by mode of transfer referred to in sections 47 (e.g., transfer of capital asset under a gift, transfer of capital asset to an irrevocable trust, transfer of capital asset between holding company and its subsidiary, transfer in accordance to amalgamation, demerger, etc.) or 50B (slump sale) of the Act, if the previous owner of such shares has not acquired them by any mode referred to in clause (a) or clause (b) or clause (c) [other than the transactions referred to in the proviso to clause (a) or clause (b)].

Amendments

This notification no. 43/2017 was issued as on 05/06/2017 by the Govt. stating all transactions of transfer of equity shares recorded on or after 01/10/2004 that are not chargeable to STT except for the situations in clause (a), but also includes the situations in clause (b).

This notification shall be in effect from 01/04/2018 and be applicable for the assessment year 2018-19 and onwards.

To know how to utilize the tax saving options available to you and for better tax planning options, consult your personal tax expert at H&R Block India.

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