Section 10(38) of the Income Tax Act was once the golden clause for investors & traders in the stock market. It provided a full tax exemption for long-term capital gains arising from the sale of certain securities. But how relevant is it today? What is its applicability, & who can still benefit? Let’s decode this once-popular provision & understand its importance in India’s income tax law.
What Is Section 10(38) of the Income Tax Act?
Section 10(38) of the Income Tax Act offers an exemption on any income arising from the transfer of a long-term capital asset, such as listed equity shares, units of equity-oriented mutual funds, or units of business trusts, provided the transaction is chargeable to Securities Transaction Tax (STT).
This means, if you sold your long-term listed shares & paid STT on them, you didn’t need to pay any tax on the capital gains made—up until FY 2017–18. This provision helped many investors to plan their tax & investment strategy efficiently.
Amendment in Section 10(38)
The Finance Act of 2018 brought a significant amendment. From April 1, 2018, the tax exemption under Section 10(38) was withdrawn. In its place, a new provision — Section 112A — was introduced, which taxes long-term capital gains exceeding ₹1 lakh at a 10% rate (without indexation benefits).
So, while Section 10(38) still exists in law, its practical utility is only for gains made before 31st March 2018. Transactions after that are governed by the new provisions.
Applicability of Section 10(38)
The applicability of Section 10(38) is now limited to past assessment years. If you made any gains before FY 2018–19, & they meet all the required conditions — like holding the asset for more than 12 months, payment of STT, & the asset being a listed equity share or mutual fund unit, then you could claim exemption under this section.
This section does not apply to short-term gains or long-term gains that are not subject to STT or involve unlisted shares. "
What Kind of Income Is Exempt Under Section 10(38)?
As per the law, any income arising from the transfer of a long-term capital asset, which is:
- An equity share in a company listed on a recognised stock exchange in India.
- A unit of an equity-oriented mutual fund.
- A unit of a business trust.
…is exempt from tax under Section 10(38), provided the acquisition of shares is chargeable to STT & the transfer is through a recognised exchange.
This exemption on long-term capital gains was a significant benefit for long-term investors & gave a boost to equity investments.
Section 10(38) vs Section 112A
Post-April 2018, Section 112A took over. Under 112A:
- LTCG above ₹1 lakh on listed equity shares, equity mutual funds, or units of business trusts is taxed at 10%.
- STT must still be paid on acquisition & transfer.
- Indexation benefit is not available.
So, Section 10(38) is still relevant historically or when dealing with past transactions, but current & future gains are assessed under Section 112A.
Common Questions on Section 10(38)
- Can I still claim benefits under Section 10(38)?
Only if your capital gain transaction occurred before 31 March 2018 & meets all the conditions mentioned above. - Is there any limit under Section 10(38)?
There is no upper limit on exemption under Section 10(38). However, it has been replaced with a ₹1 lakh exemption limit under Section 112A. - Do I need to disclose exempt LTCG in my ITR?
Yes, even if it is exempt under Section 10(38), you must disclose the amount in the “Exempt Income” section of your Income Tax Return. "
Final Thoughts
While Section 10(38) of the Income Tax Act no longer applies to current transactions, it remains important for retrospective assessments, audits, & clarifications. If you had investments before April 2018, knowing this section can help ensure compliance & save on taxes legally.
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