Benefit of Section 10(38) is restricted!

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Long term capital gains arising from transfer of equity shares and units of an equity-oriented fund is exempt from income-tax under section 10(38) of the Income-tax Act, 1961 . The Finance Minister in Budget 2018 has withdrawn exemption under section 10(38) of the Act with effect from assessment year 2019-20 onwards. Long term capital gains exceeding Rs1 lakhs, arising from transfer of equity shares or unit of equity-oriented fund shall be taxed at 10%, provided Securities Transaction Tax has been paid. Further, since Securities Transaction Tax has not been abolished by the government, levy of the same on purchase/ sale transaction will lead to double taxation.

The provisions of section 10(38) of the Income-tax Act, 1961 were introduced in India in Finance Act, 2004 to attract foreign investors to invest funds in India. Long term capital gains arising from transfer of equity share in a company or unit of equity oriented fund and unit of a business trust are exempt under section 10(38) of the Act, if Securities Transaction Tax has been paid on the transfer of such units and on both acquisition and transfer of such equity shares.

The Finance Minister mentioned that the existing tax regime is inherently biased against manufacturing sector and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss.

The Finance Minister has proposed to withdraw the exemption section 10(38) of the Act on long term capital gains exceeding Rs 1 lakhs. Further, it has been proposed to introduce a new section 112A in the Act to provide that long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity- oriented fund or a unit of a business trust shall be taxed at 10% of such capital gains exceeding Rs1 lakhs. Long term capital gains shall be computed without giving effect of inflation indexation and benefit of computation of capital gains in foreign currency to non-resident.

The concessional rate of 10% will be applicable to such long term capital gains where Securities Transaction Tax has been paid on both acquisition and transfer of a capital asset being equity share in a company and transfer of a capital asset being unit of an equity-oriented fund or a unit of a business trust

The central government will notify the nature of acquisitions of equity shares in a company in respect of which the requirement of payment of Securities Transaction Tax will not apply.

Section 112A of Income Tax Act 1961

 Tax on long-term capital gains in certain cases.—(1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if—

(i) the total income includes any income chargeable under the head “Capital gains”;
(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;
(iii) securities transaction tax under Chapter VII of the Finance Act, 2004 has,—
(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or
(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of

(i) the amount of income-tax calculated on such long-term capital gains exceeding Rs 1 lakhs at the rate of 10%; and
(ii) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

(4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.

(5) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

(6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

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