Section 10(38) of the Income Tax Act, 1961 is a significant provision that deals with the exemption of long-term capital gains arising from the transfer of equity shares or units of an equity-oriented fund. This provision has been introduced to encourage investment in the stock market and mutual funds and to provide relief to taxpayers from the burden of capital gains tax. In this blog, we will discuss Section 10(38) of the Income Tax Act in detail and understand its various aspects.
What is Section 10(38) of the Income Tax Act?
Section 10(38) of the Income Tax Act, 1961 provides an exemption to taxpayers on long-term capital gains arising from the transfer of equity shares or units of an equity-oriented fund. This section was introduced by the Finance Act, 2017, and is applicable from the Assessment Year 2018-19 onwards. The purpose of this section is to promote investment in the stock market and mutual funds by providing tax relief on long-term capital gains.
Conditions to Claim Exemption under Section 10(38)
To claim exemption under Section 10(38) of the Income Tax Act, the following conditions must be fulfilled:
The asset transferred must be equity shares of a company listed on a recognized stock exchange or units of an equity-oriented fund.
The transfer must be made on or after 1st April 2017.
The asset must be held for a minimum period of 12 months from the date of acquisition to qualify as a long-term capital asset.
The transaction must be subject to Securities Transaction Tax (STT).
If all the above conditions are fulfilled, then the long-term capital gains arising from the transfer of equity shares or units of an equity-oriented fund are exempt from tax under Section 10(38) of the Income Tax Act.
Impact of Section 10(38) on Taxpayers
Section 10(38) of the Income Tax Act has provided significant relief to taxpayers who invest in the stock market and mutual funds. The exemption of long-term capital gains has made it more attractive for taxpayers to invest in equity shares or equity-oriented funds for the long term. This has resulted in increased investment in the stock market and mutual funds, which has further helped in the growth of the Indian economy.
However, it is essential to note that the exemption under Section 10(38) is available only for long-term capital gains. Short-term capital gains arising from the transfer of equity shares or units of an equity-oriented fund are taxable at the rate of 15% under Section 111A of the Income Tax Act.
Benefits of Section 10(38) of the Income Tax Act
Section 10(38) of the Income Tax Act has several benefits for taxpayers. Some of these benefits are:
Tax Savings: Taxpayers can save on long-term capital gains tax by investing in equity shares or units of an equity-oriented fund. The exemption under Section 10(38) helps taxpayers in reducing their tax liability significantly.
Encourages Investment: The exemption under Section 10(38) encourages taxpayers to invest in the stock market and mutual funds for the long term. This promotes economic growth as well as helps individuals to achieve their financial goals.
Simplifies Taxation: The provision under Section 10(38) simplifies taxation for investors who hold equity shares or units of an equity-oriented fund for the long term. They can avoid the hassle of calculating and paying capital gains tax on these investments.
Boosts Investor Confidence: The exemption under Section 10(38) enhances investor confidence in the equity market and mutual funds, as it reduces the tax burden on long-term investments.
Challenges of Section 10(38) of the Income Tax Act
While Section 10(38) of the Income Tax Act has several benefits, there are also some challenges associated with it. Some of these challenges are:
Compliance: To claim the exemption under Section 10(38), taxpayers must fulfill all the conditions specified under the section. This includes holding the equity shares or units of an equity-oriented fund for the minimum period of 12 months and paying STT. Compliance with these conditions can be challenging for some taxpayers.
Revenue Loss: The exemption under Section 10(38) results in a revenue loss for the government. As the exemption applies only to long-term capital gains, the government loses out on tax revenue on short-term capital gains.
Equity Market Volatility: The exemption under Section 10(38) is subject to market risks. The equity market is volatile, and the value of equity shares and units of an equity-oriented fund can fluctuate significantly. Investors may not always benefit from the exemption if they sell their investments at a lower value than their purchase price.
Conclusion
Section 10(38) of the Income Tax Act has been a significant provision for taxpayers who invest in the stock market and mutual funds. The exemption of long-term capital gains tax has encouraged investment in these instruments and has helped in the growth of the Indian economy. While there are some challenges associated with the provision, the benefits outweigh them. The government must continue to promote investment in the stock market and mutual funds by introducing such measures.
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)
Q: What is Section 10(38) of the Income Tax Act?
A: Section 10(38) of the Income Tax Act, 1961 is a provision that exempts long-term capital gains arising from the transfer of equity shares or units of an equity-oriented fund.
Q: When was Section 10(38) introduced?
A: Section 10(38) was introduced by the Finance Act, 2017, and is applicable from the Assessment Year 2018-19 onwards.
Q: What are the conditions to claim exemption under Section 10(38)?
A: To claim exemption under Section 10(38), the asset transferred must be equity shares of a company listed on a recognized stock exchange or units of an equity-oriented fund. The transfer must be made on or after 1st April 2017, and the asset must be held for a minimum period of 12 months from the date of acquisition. The transaction must also be subject to Securities Transaction Tax (STT).
Q: What is the tax rate for short-term capital gains on equity shares or units of an equity-oriented fund?
A: Short-term capital gains on equity shares or units of an equity-oriented fund are taxable at the rate of 15% under Section 111A of the Income Tax Act.
Q: Is there any limit on the amount of capital gains that can be exempted under Section 10(38)?
A: There is no limit on the amount of capital gains that can be exempted under Section 10(38) of the Income Tax Act.
Q: Can the exemption under Section 10(38) be claimed on investments made before 1st April 2017?
A: No, the exemption under Section 10(38) is applicable only to investments made on or after 1st April 2017.
Q: Is the exemption under Section 10(38) applicable to non-resident taxpayers?
A: Yes, the exemption under Section 10(38) is applicable to non-resident taxpayers as well, subject to the conditions specified under the section.
Q: What is the impact of Section 10(38) on the Indian economy?
A: Section 10(38) has resulted in increased investment in the stock market and mutual funds, which has helped in the growth of the Indian economy. The provision has also enhanced investor confidence in the equity market and mutual funds.
Q: What are the challenges associated with Section 10(38)?
A: Some of the challenges associated with Section 10(38) include compliance with the conditions specified under the section, revenue loss for the government, and market risks associated with the equity market.
Q: Is the exemption under Section 10(38) available to all taxpayers?
A: Yes, the exemption under Section 10(38) is available to all taxpayers who fulfill the conditions specified under the section.
