Section 10(38): Long-Term Capital Gains on Equity Shares and Equity-Oriented Funds
Section 10(38) of the Income-tax Act, 1961 historically exempted certain long-term capital gains on listed equity shares, equity-oriented mutual fund units and later business trust units. The broad exemption ended for transfers on or after 1 April 2018. Understanding the change is essential before preparing a current tax return.
Historical eligible assessee: Any assessee meeting the statutory conditions.
Historical income: Qualifying long-term capital gains from specified equity-linked securities.
Historical exemption: Full qualifying gain under Section 10(38), for the relevant period.
From 1 April 2018: Special capital gains taxation under Section 112A replaced the broad exemption.
From 23 July 2024: Under the amended 1961 Act, generally 12.5% on aggregate Section 112A gains exceeding Rs. 1,25,000, subject to applicable conditions.
What was Section 10(38)?
Section 10(38) was a provision of the Income-tax Act, 1961 excluding qualifying long-term capital gains from total income. It applied to specified transfers of equity shares in a company, units of an equity-oriented fund, and, after relevant amendments, units of a business trust. The exemption was tied to the introduction and operation of securities transaction tax (STT) under Chapter VII of the Finance (No. 2) Act, 2004.
The historical provision is important for reviewing older assessment years, legacy transactions and the tax history of equity investments. It should not be presented as a blanket exemption for contemporary equity gains.
Eligible assessee, income and historical exemption
| Eligible assessee | Any assessee, subject to the conditions of the relevant version of Section 10(38). |
|---|---|
| Nature of income | Long-term capital gain arising on transfer of qualifying equity shares, equity-oriented fund units or eligible business trust units. |
| Amount historically exempt | The entire qualifying long-term capital gain, subject to the law applicable to the transfer date. |
| STT condition | Relevant transactions generally had to satisfy securities transaction tax conditions, with exceptions or notified cases under the law then applicable. |
| Current relevance | Historical tax years and determining treatment of later disposals under the applicable capital gains provisions. |
Conditions that applied under Section 10(38)
- Long-term capital asset: The gain had to arise from a qualifying long-term capital asset, not a short-term holding.
- Specified security: The asset had to be an eligible equity share, unit of an equity-oriented fund or, where applicable, unit of a business trust.
- Relevant period: The transfer had to fall within the period for which Section 10(38) operated. The general exemption ceased for transfers on or after 1 April 2018.
- STT requirements: Applicable STT requirements had to be met. For equity shares, acquisition-related STT conditions introduced through later amendments and notified exceptions could also matter.
- Other statutory rules: Specific exclusions, including the historical treatment of book profits under Section 115JB, were governed by the applicable version of the Act.
Meaning of an equity-oriented fund
For the historical exemption, an equity-oriented fund generally referred to a qualifying mutual fund scheme with the prescribed proportion of investible funds invested in equity shares of domestic companies. The source article refers to a 65% domestic-equity investment threshold and a mutual fund specified under Section 10(23D). The precise definition, calculation method and any special treatment of fund-of-funds structures depend on the provision and year involved.
How the law changed
| Period | Broad tax position |
|---|---|
| Historical transfers before 1 April 2018 | Qualifying long-term gains could be fully exempt under Section 10(38), subject to statutory conditions. |
| Transfers from 1 April 2018 | Section 112A introduced a special regime for qualifying long-term equity gains. The former general exemption under Section 10(38) no longer applied. |
| Transfers before 23 July 2024 under Section 112A | Generally 10% on aggregate qualifying gains above Rs. 1 lakh, subject to applicable provisions. |
| Transfers on or after 23 July 2024 under amended Section 112A | Generally 12.5% on aggregate qualifying gains above Rs. 1.25 lakh, plus applicable surcharge and cess. |
| Tax year 2026-27 onward | The Income-tax Act, 2025 applies from 1 April 2026; consult its corresponding capital gains provisions and transition rules rather than assuming 1961 Act section numbers remain operative. |
Taxation of long-term equity gains after the exemption
Under Section 112A of the Income-tax Act, 1961, as amended for relevant transfers on or after 23 July 2024, qualifying long-term capital gains from specified equity shares, equity-oriented mutual fund units and business trust units were generally taxable at 12.5% to the extent aggregate gains exceeded Rs. 1,25,000. Applicable surcharge and health and education cess are additional. Eligibility, holding periods, STT conditions, residence, and specific exemptions or transitional rules can affect the result.
Grandfathering: Section 112A contained a special cost-of-acquisition rule for qualifying assets acquired before 1 February 2018, using the fair market value as of 31 January 2018 in the prescribed calculation. This rule can remain relevant to later sales of older holdings.
Not every equity profit qualifies: Short-term gains, unlisted shares, business income from share trading, and certain transactions failing STT or other conditions can be taxed differently.
Illustrative calculation
Assume an individual has aggregate qualifying long-term equity capital gains of Rs. 2,00,000 on a transfer governed by the amended Section 112A rules after 23 July 2024. Ignoring other adjustments, the portion above Rs. 1,25,000 is Rs. 75,000. At 12.5%, the basic capital gains tax would be Rs. 9,375, before surcharge or cess, if applicable. The calculation is illustrative and does not replace the applicable tax-year rules.
Documents to retain
- Broker contract notes, purchase and sale statements and demat records.
- Acquisition dates, transfer dates and holding-period calculations.
- STT evidence where required and details of relevant exceptions.
- Historical 31 January 2018 valuation data where grandfathering rules apply.
- Mutual fund capital gains statements, fund classification and annual tax statements.
Frequently asked questions
Are all long-term gains on listed shares tax-free?
No. The former broad Section 10(38) exemption ended for transfers on or after 1 April 2018. Later gains are assessed under the applicable capital gains rules.
Who was eligible for Section 10(38)?
Any assessee could potentially qualify if the long-term asset, transfer date, STT and other statutory conditions were satisfied.
Did the exemption cover equity mutual funds?
Yes, eligible units of an equity-oriented fund were covered, subject to the legal definition and conditions.
Is securities transaction tax always required?
STT is an important statutory condition, but the precise requirement and notified exceptions depend on the type of security, acquisition and transfer.
Does Section 10(38) still exempt gains in 2026?
No general exemption under historical Section 10(38) is available for current transfers. Apply the law governing the relevant tax year, including the Income-tax Act, 2025 from 1 April 2026.
Official legal references
- Income Tax Department - income-tax legislation, amendments and explanatory guidance.
- India Code - official legislative texts, including the Income-tax Acts of 1961 and 2025.
- Income Tax e-Filing Portal - current filing guidance and return utilities.
- Securities and Exchange Board of India - mutual fund and securities regulatory information.
Related reading: Income exempt under Section 10, tax-exempt income, Chapter VI-A deductions and income-tax return filing software.
This article provides general legal and tax information. Verify the provisions and rates applicable to the date of transfer and tax year before filing a return.