Section 10(38) of the Income Tax Act, 1961 provides for the exemption of long-term capital gains arising from the transfer of equity shares or units of equity-oriented funds or units of a business trust. This provision has been the subject of much discussion and controversy in recent years, especially in light of the amendments made to the section in the Finance Act, 2018. In this blog post, we will explore Section 10(38) of the Income Tax Act, 1961 in detail, with proper headings.
Overview of Section 10(38)
Section 10(38) provides that long-term capital gains arising from the transfer of equity shares or units of equity-oriented funds or units of a business trust shall be exempt from income tax, provided that the transaction is entered into on or after October 1, 2004, and the securities transaction tax (STT) is paid on the transaction.
Meaning of long-term capital gains
Long-term capital gains are gains arising from the transfer of a capital asset held for a period of more than 36 months. In the case of equity shares, the period is reduced to 12 months.
Equity shares
Equity shares are shares of a company that carry voting rights and are classified as equity under the Companies Act, 2013. To qualify for exemption under Section 10(38), the equity shares must be listed on a recognized stock exchange in India.
Units of equity-oriented funds
Units of equity-oriented funds are units of mutual funds or exchange-traded funds (ETFs) that invest at least 65% of their assets in equity shares of domestic companies. To qualify for exemption under Section 10(38), the units must be listed on a recognized stock exchange in India.
Units of a business trust
Units of a business trust are units of a trust that is registered as an Infrastructure Investment Trust (InvIT) or a Real Estate Investment Trust (REIT) under the Securities and Exchange Board of India (SEBI) Regulations, 2014. To qualify for exemption under Section 10(38), the units must be listed on a recognized stock exchange in India.
Securities Transaction Tax (STT)
The exemption under Section 10(38) is available only if the STT is paid on the transaction. STT is a tax on the value of taxable securities transactions, including equity shares, units of equity-oriented funds, and units of business trusts. It is levied at the time of the transaction and is payable by the buyer and the seller.
Amendments made to Section 10(38) by the Finance Act, 2018
The Finance Act, 2018 amended Section 10(38) to provide that the exemption would not be available in respect of long-term capital gains arising from the transfer of equity shares or units of equity-oriented funds or units of a business trust made on or after April 1, 2018, unless the acquisition cost of such equity shares or units is determined on the basis of the actual purchase price paid by the taxpayer.
Controversies surrounding Section 10(38)
In recent years, Section 10(38) has been the subject of much controversy, with some critics arguing that the provision is being misused by taxpayers to evade tax. The government has also expressed concerns about the potential revenue loss resulting from the exemption. As a result, the Finance Act, 2018, introduced several amendments to the provision, including the requirement for the acquisition cost to be based on the actual purchase price paid by the taxpayer.
Impact on taxpayers
For taxpayers who meet the conditions for exemption under Section 10(38), the provision can provide significant tax savings on long-term capital gains. However, the requirement to pay STT can also increase the transaction costs of the investment. Additionally, the amendments made by the Finance Act, 2018, have made it more difficult for taxpayers to claim the exemption, which may discourage some investors from investing in equity shares or equity-oriented funds.
Importance of professional advice
Given the complexities and controversies surrounding Section 10(38), it is important for taxpayers to seek professional advice before making any investment decisions. A qualified tax professional can help taxpayers understand the conditions for exemption, the impact of the STT, and the potential tax implications of the investment. This can help taxpayers make informed decisions and avoid any potential legal or tax issues.
Importance of compliance
Taxpayers who claim the exemption under Section 10(38) must ensure that they comply with all the conditions of the provision, including the payment of STT and the determination of the acquisition cost based on the actual purchase price. Non-compliance can lead to legal and tax issues, including penalties, interest, and the possibility of the tax authorities challenging the exemption.
Impact on the economy
Section 10(38) can have a significant impact on the Indian economy by encouraging investment in equity shares and equity-oriented funds. This can help increase the liquidity of the securities markets, promote economic growth, and create jobs. However, the potential revenue loss resulting from the exemption has led to concerns about the sustainability of the provision, and the government may consider further amendments or restrictions in the future.
International comparison
Many countries around the world provide exemptions or preferential tax treatment for long-term capital gains, including the United States, United Kingdom, Canada, and Australia. However, the conditions and eligibility criteria for such exemptions can vary significantly, and taxpayers must ensure that they comply with the relevant rules and regulations.
Future developments
The Indian securities markets are constantly evolving, and it is likely that Section 10(38) will continue to be subject to scrutiny and debate in the coming years. Taxpayers and investors should stay informed of any developments or changes to the provision and seek professional advice as needed.
Conclusion
Section 10(38) of the Income Tax Act, 1961 provides for the exemption of long-term capital gains arising from the transfer of equity shares or units of equity-oriented funds or units of a business trust, subject to certain conditions. While the provision has been the subject of much discussion and controversy in recent years, it remains an important provision for taxpayers who invest in the Indian securities markets.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
What is Section 10(38) of the Income Tax Act, 1961?
Section 10(38) is a provision of the Income Tax Act that provides an exemption for long-term capital gains arising from the transfer of equity shares, units of equity-oriented funds, or units of a business trust, subject to certain conditions.
What are the conditions for claiming exemption under Section 10(38)?
The conditions for claiming exemption under Section 10(38) include holding the asset for at least 12 months, paying Securities Transaction Tax (STT), and determining the acquisition cost based on the actual purchase price.
What is the rate of Securities Transaction Tax (STT)?
The rate of STT varies depending on the type of transaction and the asset being traded. For equity shares, the rate is 0.1% of the transaction value.
Can short-term capital gains be exempted under Section 10(38)?
No, only long-term capital gains are eligible for exemption under Section 10(38).
Are there any restrictions on the amount of capital gains that can be exempted under Section 10(38)?
No, there is no restriction on the amount of capital gains that can be exempted under Section 10(38).
Can non-residents claim exemption under Section 10(38)?
Yes, non-residents can claim exemption under Section 10(38) if they meet the conditions for exemption.
Is Section 10(38) applicable to all types of equity shares?
No, only equity shares listed on a recognized stock exchange in India are eligible for exemption under Section 10(38).
Are there any restrictions on the reinvestment of capital gains for claiming exemption under Section 10(38)?
No, there are no restrictions on the reinvestment of capital gains for claiming exemption under Section 10(38).
What are the tax implications if the conditions for exemption under Section 10(38) are not met?
If the conditions for exemption under Section 10(38) are not met, the capital gains will be subject to tax at the applicable rate.
Is it necessary to disclose the exempted capital gains in the income tax return?
Yes, taxpayers must disclose the exempted capital gains in the income tax return, even though they are not taxable.
