Long Term Capital Gain On Sale Of Listed Equity Shares - Notalways Exempt

BACKGROUND

At present, Long Term Capital Gain (LTCG) on transfer of equity shares of a company is exempt under section 10(38) of the Income Tax Act, if the sale has been undertaken on or after October 1, 2004 and Security Transaction Tax (STT) is paid at the time of sale. Once these two conditions are satisfied, the LTCG is exempt, irrespective whether it is sham or bogus transaction.

- Jayesh Dadia

The memorandum explaining the Finance Bill has provided the intent for the amendment to the section to prevent abuse as it has been noticed that the exemption is being misused by certain persons for declaring their unaccounted income as exempt LTCG by entering into sham transactions. More than 200 shell companies were suspended and more than 1,300 entities banned from the market for taking benefit of bogus LTCG. Tax evasion is of more than Rs15,000 crore.

In order to prevent misuse of this exemption by persons dealing in penny stocks, Section 10(38) is amended with effect from assessment year 2018-19. Under the amended provisions, the exemption shall be available only if STT is paid not only at the time of sale, but also at the time of acquisition of shares. Thus, to avail exemption under section 10(38), the assessee has to establish that both at the time of acquisition and at the time of sale he has paid STT.

RELEVANT AMENDED PROVISIONS { SECTION 10(38) }

(i) Income arising from transfer of long term capital assets being the equity shares in a company.

(ii) Transaction of sale of such equity shares is entered into on or after October 1, 2004 and such transaction is chargeable to STT

(iii)If the shares are acquired on or after October 1, 2004, then at the time of purchase, STT is paid.