Section 10(38) of the Income Tax Act 1961 provides an exemption on long-term capital gains from the sale of equity shares of a company or a unit of an equity-oriented mutual fund. This section was introduced in 2004 to promote investment in the stock market and to encourage the long-term holding of equity shares.
What are Long-term Capital Gains (LTCG)?
Before diving into Section 10(38), it is essential to understand what is long-term capital gains. Capital gains are the profits that arise from the sale of a capital asset, such as equity shares, mutual funds, real estate, etc. If an asset is held for more than 36 months, it is considered as a long-term asset. Thus, the profits from the sale of long-term assets are called long-term capital gains.
Understanding Section 10(38):
Section 10(38) provides an exemption on long-term capital gains arising from the sale of equity shares of a company or a unit of an equity-oriented mutual fund. Let’s understand the key provisions of this section:
- Applicability: This section applies only to long-term capital gains. Short-term capital gains from the sale of equity shares or equity-oriented mutual funds are taxable at the rate of 15%.
- Equity Shares: The exemption under this section applies only to equity shares of a company. It does not apply to preference shares or any other type of shares.
- Holding Period: To claim the exemption under Section 10(38), the equity shares or mutual fund units must be held for more than 12 months. If the holding period is less than 12 months, the gains will be treated as short-term capital gains and taxed accordingly.
- Listed Securities: The exemption under this section is available only if the equity shares or mutual fund units are listed on a recognized stock exchange in India. The recognized stock exchanges include BSE (Bombay Stock Exchange), NSE (National Stock Exchange), and others.
- Securities Transaction Tax (STT): The exemption under Section 10(38) is available only if the sale of equity shares or mutual fund units is subject to Securities Transaction Tax (STT). STT is a tax levied on the sale of securities listed on recognized stock exchanges in India.
- Exclusion: The exemption under this section is not available if the long-term capital gains arising from the transfer of equity shares or mutual fund units that were acquired by the taxpayer on or after 1st October 2004 and the STT was not paid at the time of acquisition.
Conclusion:
Section 10(38) of the Income Tax Act 1961 provides an exemption on long-term capital gains arising from the sale of equity shares of a company or a unit of an equity-oriented mutual fund. This section was introduced to promote investment in the stock market and to encourage the long-term holding of equity shares. To claim the exemption under this section, the equity shares or mutual fund units must be held for more than 12 months and listed on a recognized stock exchange in India, and the sale must be subject to STT. It is important to note that this exemption is not available if the long-term capital gains arising from the transfer of equity shares or mutual fund units that were acquired after 1st October 2004 and STT was not paid at the time of acquisition. Understanding the provisions of Section 10(38) can help taxpayers plan their investments and reduce their tax liabilities.
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:
Q1. What is Section 10(38) of the Income Tax Act 1961?
A1. Section 10(38) of the Income Tax Act 1961 provides an exemption on long-term capital gains arising from the sale of equity shares of a company or a unit of an equity-oriented mutual fund.
Q2. What is long-term capital gain?
A2. Long-term capital gains are the profits that arise from the sale of a capital asset, such as equity shares, mutual funds, real estate, etc. If an asset is held for more than 36 months, it is considered a long-term asset. Thus, the profits from the sale of long-term assets are called long-term capital gains.
Q3. What is the holding period for equity shares to qualify for exemption under Section 10(38)?
A3. The equity shares or mutual fund units must be held for more than 12 months to qualify for exemption under Section 10(38).
Q4. Is the exemption under Section 10(38) available for short-term capital gains?
A4. No, the exemption under Section 10(38) applies only to long-term capital gains. Short-term capital gains from the sale of equity shares or equity-oriented mutual funds are taxable at the rate of 15%.
Q5. Which types of shares are eligible for exemption under Section 10(38)?
A5. The exemption under Section 10(38) applies only to equity shares of a company. It does not apply to preference shares or any other type of shares.
Q6. What are the recognized stock exchanges for Section 10(38)?
A6. The recognized stock exchanges for Section 10(38) include BSE (Bombay Stock Exchange), NSE (National Stock Exchange), and others.
Q7. What is Securities Transaction Tax (STT)?
A7. Securities Transaction Tax (STT) is a tax levied on the sale of securities listed on recognized stock exchanges in India.
Q8. Is the exemption under Section 10(38) available if STT was not paid at the time of acquisition?
A8. No, the exemption under Section 10(38) is not available if the long-term capital gains arising from the transfer of equity shares or mutual fund units that were acquired by the taxpayer on or after 1st October 2004 and STT was not paid at the time of acquisition.
Q9. How can one claim an exemption under Section 10(38)?
A9. To claim the exemption under Section 10(38), the taxpayer needs to report the long-term capital gains in the income tax return and claim the exemption while computing the taxable income.
Q10. Can an NRI claim exemption under Section 10(38)?
A10. Yes, an NRI can claim an exemption under Section 10(38) if the conditions are met. However, NRIs may have to comply with certain additional requirements and restrictions.
