Exemption of long-term capital gains on sale of equity shares / units of an equity oriented fund [Section 10(38)] :

(i) This clause exempts LTCG on sale of equity shares of a company or units of an equity oriented fund or unit of a business trust1.

(ii) This exemption is available only if such transaction is chargeable to securities transaction tax.

(iii) However, such long term capital gains exempt under section 10(38) shall be taken into a account in computing the book profit and income tax payable under section 115JB.

(iv) ―Equity oriented fund‖ means a fund –

(1) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund; [The percentage of equity share holding of the fund should be computed with reference to the annual average of the monthly averages of the opening and closing figures], and

(2) which has been set up under a scheme of a Mutual Fund specified under clause (23D) The percentage of equity share holding of the fund should be computed with reference to the annual average of the monthly averages of the opening and closing figures.

Illustration
Mr. Basu purchased 2,000 equity shares of ABC Ltd. (a listed company) on 1.4.201 3 at Rs 20 per share. He sold all the shares on 1.6.2015 at Rs 50 per share. He also had to pay securities transaction tax (STT) on the same. Explain the taxability in the hands of Mr. Basu in the year of transfer i.e. A.Y.2016-17.
Solution
In the given problem, since the listed equity shares of ABC Ltd. are being sold after 12 months, 1 As per section 2(13A), business trust means a trust registered as an Infrastructure Investment Trust or a Real Estate Investment Trust, the units of which are required to be listed on a recognized stock exchange, in accordance with SEBI regulations and notified by the Central Government in this behalf. The taxability of business trust, as contained in Chapter XII-FA, and the other related provisions have been dealt with in Chapter 13 Assessment of Various Entities.  there is a long-term capital gains (LTCG) on the sale of these shares. Also, STT has also been paid on these shares. Thus, as per section 10(38), the entire LTCG arising on such sale will be fully exempt and nothing is taxable in the hands of Mr.Basu in the year of sale i.e. A.Y.2016-17.

Illustration
Will your answer be different if these shares were preference shares and not equity shares? Explain.
Solution
As per section 10(38), LTCG on sale of eligible equity shares of a company shall be exempt. Since the shares are preference shares and not equity shares, the provisions of this section are not attracted and the capital gains arising on such sale will be taxable in the hands of Mr. Basu in the A.Y. 2016-17.

Illustration
Will you answer be different if these shares were not listed in a recognised stock exchange? Explain.
Solution
As per section 10(38), LTCG on sale of equity shares of a company shall be exempt. However, this exemption is available only if such transaction is chargeable to securities transaction tax. Since the shares are not listed in a recognised stock exchange, STT will not be chargeable, hence the provisions of this section are not attracted and the capital gains arising on such sale will be taxable in the hands of Mr. Basu in the A.Y.2016-17.