Equity investments are one of the most popular ways to build wealth in India. Alongside the potential for high returns, the Indian Income Tax Act also offers certain exemptions to incentivise long-term investments in equities. Section 10(36) of the Income Tax Act is one such provision, introduced to promote the equity market by offering tax relief on certain long-term capital gains (LTCG).
This section specifically deals with any income arising from the transfer of a long-term capital asset in the form of eligible equity shares. It ensures that such gains are incomes not included in total income, subject to specific conditions, thus reducing the overall tax liability for investors.
What is Section 10(36)?
Section 10(36) was introduced to provide a tax exemption on long term capital gains on transfer of eligible equity shares acquired between certain dates and held for a specified minimum period. This exemption was applicable before the introduction of Section 112A, which reintroduced tax on LTCG from equity shares exceeding ₹1 lakh.
Under this section, LTCG on eligible equity shares shall be exempt if all the conditions laid down are satisfied. It was especially beneficial for early investors in the Indian capital market when long-term investments were being actively encouraged by the government.
Scope and Applicability
The scope of Section 10(36) covers:
- Eligible Equity Shares – Only those equity shares that fall within the definition of ‘eligible’ under the law qualify.
- Holding Period – The shares must be held for more than 12 months to be classified as a long-term capital asset.
- Date of Acquisition – The shares should have been acquired within the notified period when this section was in force.
- Listed Shares Only – The benefit applies only to shares listed on a recognised stock exchange in India.
Any Income Arising from the Transfer of a Long-Term Capital Asset
The phrase “any income arising from the transfer of a long-term capital asset” in this section refers to the gains made when selling an equity share after holding it for the prescribed period. These gains would generally be taxable under the head ‘Capital Gains.’ However, Section 10(36) provided a complete exemption for such income if conditions were fulfilled.
This made equity investments more attractive, particularly for long-term investors, as they could enjoy capital appreciation without worrying about paying tax on it."
Incomes Not Included in Total Income
One of the main attractions of Section 10(36) is that the eligible LTCG was considered as incomes not included in total income. This means that the exempt gains did not even form part of the taxable income while calculating total income for the financial year.
For example: If an investor earned ₹5 lakh in salary and ₹2 lakh in exempt LTCG under Section 10(36), only ₹5 lakh would be considered for taxation, significantly lowering the tax burden.
Also Read: Long-Term Capital Gains Tax on Shares and Equity Mutual Funds
Long Term Capital Gains on Transfer of Eligible Equity Shares
The core benefit of this section lies in the exemption of long term capital gains on transfer of eligible equity shares. If the investor held the shares for more than 12 months and met all other requirements, the entire gain was tax-free.
For instance, if you purchased 1,000 shares at ₹200 each (₹2,00,000 total) and sold them after 14 months for ₹350 each (₹3,50,000 total), your LTCG of ₹1,50,000 could be entirely exempt under Section 10(36), provided the shares were eligible.
LTCG on Eligible Equity Shares Shall Be Exempt – Key Conditions
For LTCG on eligible equity shares shall be exempt, the following conditions had to be met:
- The equity shares must be listed on a recognised Indian stock exchange.
- The shares must have been acquired within the government-notified period.
- The shares must have been held for more than 12 months before transfer.
- The transaction must be genuine and not part of a tax avoidance scheme."
Various Expenses That Are Allowed as a Deduction
While Section 10(36) itself deals with exemption, it’s worth noting that while computing LTCG in other cases, various expenses that are allowed as a deduction include:
- Brokerage charges paid during sale.
- Securities transaction tax (STT) in specific cases.
- Demat account charges related to the transaction.
- Transfer fees or stamp duty on share transfer.
However, in the case of complete exemption under Section 10(36), these deductions were not required since the gain itself was not taxed.
Practical Example
Example 1 – Eligible for Exemption
- Purchase: 500 shares @ ₹100 each = ₹50,000
- Sale (after 15 months): ₹160 per share = ₹80,000
- LTCG: ₹30,000
Since the shares met all conditions, LTCG on eligible equity shares shall be exempt under Section 10(36).
Example 2 – Not Eligible for Exemption
- Purchase: 500 shares @ ₹100 each = ₹50,000
- Sale (after 6 months): ₹160 per share = ₹80,000
- Gain: ₹30,000
This gain is a short-term capital gain and not covered under Section 10(36)."
Relevance Today
While Section 10(36) applied to specific periods and acquisitions, its spirit continues under current tax rules for certain cases, such as exemptions for listed securities acquired before 31 January 2018 under grandfathering provisions.
Understanding historical sections like 10(36) helps investors plan better and appreciate how India’s capital gains taxation has evolved.
Also Read: Short-Term Capital Gains Tax on Equity Shares & Mutual Funds
Conclusion
Section 10(36) of the Income Tax Act was a significant step in promoting long-term investment in the Indian equity market. By exempting any income arising from the transfer of a long-term capital asset in the form of eligible equity shares, it reduced tax liability for genuine investors. It covered incomes not included in total income, explained various expenses that are allowed as a deduction in general capital gain calculations, and ensured that long term capital gains on transfer of eligible equity shares could be enjoyed tax-free when conditions were met.
For those eligible, LTCG on eligible equity shares shall be exempt, making it one of the most investor-friendly provisions during its time.
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