Delhi ITAT Clarifies: LTCG Exemption Under Section 10(38) Only for Equity Shares and Equity-Oriented Mutual Funds

Delhi ITAT Clarifies: LTCG Exemption Under Section 10(38) Only for Equity Shares and Equity-Oriented Mutual Funds

Tribunal Remits Case After Finding Possible Derivative Transactions

Exemption Not Available for Unlisted Shares or Other Securities

By Our Legal Reporter

New Delhi: November 25, 2025:

In a landmark ruling, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that Long-Term Capital Gains (LTCG) are exempt under Section 10(38) of the Income Tax Act only when they arise exclusively from equity shares and equity-oriented mutual funds. The Tribunal remitted the matter back to the Assessing Officer (AO) after finding that the assessee may have also dealt in derivatives and unlisted shares, which do not qualify for exemption.

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This judgment is expected to have wide implications for investors and businesses, especially those engaged in complex securities transactions.

Background of the Case

The case involved Vireet Investments Pvt. Ltd., which filed its income tax return declaring nil income, including an exempt LTCG of ₹8.90 crore under Section 10(38).

• The assessee claimed exemption on the basis that the gains were from equity shares.
• The Commissioner of Income Tax (Appeals) [CIT(A)] examined only part of the sample contract notes.
• The ITAT observed that it could not be ruled out that the assessee had also transferred derivatives or unlisted shares.
• Since Section 10(38) applies only to equity shares and equity-oriented mutual funds, the Tribunal remitted the matter back to the AO for fresh verification.

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Court’s Observations

The ITAT made several important observations:

• Section 10(38) exemption is limited: Only LTCG from equity shares and equity-oriented mutual funds qualify.
• Derivatives and unlisted shares excluded: Gains from derivatives, bonds, debentures, or unlisted shares are not covered.
• Need for complete verification: The CIT(A) had examined only part of the evidence, which was insufficient.
• Matter remitted: The Tribunal directed the AO to re-examine all contract notes and transactions before granting exemption.

Wider Legal Context

This ruling aligns with earlier judicial interpretations:

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• The ITAT Cuttack in Ridhi Bagaria vs. ITO (2023) held that LTCG exemption under Section 10(38) is allowable only when requisite conditions are satisfied, including sale through recognized stock exchanges and payment of Securities Transaction Tax (STT).
• The Supreme Court and High Courts have consistently emphasized that exemptions must be strictly construed and cannot be extended to instruments not specified in law.
• Section 10(38) was introduced to encourage equity investments but was never intended to cover derivatives or unlisted securities.

Implications for Taxpayers

The ruling provides clarity for investors and businesses:

• Exemption restricted: Only equity shares and equity-oriented mutual funds qualify for LTCG exemption.
• Compliance burden: Taxpayers must maintain proper documentation, including contract notes and proof of STT payment.
• Risk of reassessment: Incomplete or misleading claims may lead to reassessment and penalties.
• Investor awareness: Retail and institutional investors must carefully distinguish between exempt and non-exempt instruments.

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Expert Views

Tax professionals and legal experts have welcomed the ruling:

• Chartered accountants argue that the judgment provides clarity and prevents misuse of Section 10(38).
• Legal analysts highlight that the ruling reinforces the principle of strict interpretation of tax exemptions.
• Market experts believe the decision will encourage transparency in securities transactions and reduce litigation.

Broader Impact on Securities Market

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The ruling is expected to reshape investor behaviour:

• Equity focus: Investors may prefer equity shares and equity-oriented mutual funds to avail exemption.
• Derivative caution: Gains from derivatives will be taxed, discouraging speculative trading.
• Regulatory clarity: The judgment may prompt the Central Board of Direct Taxes (CBDT) to issue clarifications on Section 10(38).
• Reduced disputes: Clear interpretation will minimize disputes between taxpayers and authorities.

Conclusion

The Delhi ITAT’s ruling in the Vireet Investments case is a landmark in tax jurisprudence. By clarifying that LTCG exemption under Section 10(38) applies only to equity shares and equity-oriented mutual funds, the Tribunal has strengthened taxpayer awareness and compliance.

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This decision ensures that exemptions are not misused and reinforces the principle of fairness in taxation. It underscores the importance of transparency, documentation, and strict adherence to statutory provisions in India’s securities market.

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