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STT paid on long term capital gains is tax exempt

I had on December 29, 1995 invested Rs. 10 lakh in Kothari Pioneer Tax Shield 96, an equity linked savings scheme.

On redemption of the units on March 31, 2006, I was paid Rs. 87,530, out of which Securities Transaction Tax (STT) of Rs. 175 was recovered by Franklin Templeton.

Since STT was paid, is the long-term capital gain of Rs. 77,530 exempt under Sec. 10(38), although the redemption cannot be said to have been transacted through a recognised stock exchange. I may emphasise that in the case of its new Templeton India Equity Income Fund, it has been clarified that no long-term capital gains tax is chargeable on redemption of the units, since investors are liable to pay STT.

Sec. 10(38) exempts long-term capital gains on transfer of equity share in a company or a unit of an equity oriented fund, if such transaction is chargeable to STT. Since the amount received is on redemption of units in equity linked savings scheme, the assessee should be eligible for exemption of long-term capital gains.

It is true that STT is payable for all transactions through recognised stock exchanges. In the reader's case, the relevant bonds are units of an equity-oriented fund within the Explanation to Sec. 10(38). The reader is apparently an investor and not a trader acquiring shares and such bonds as stock-in-trade merely for resale, so that the surplus is not from transfer of long-term capital asset within the meaning of capital asset under Sec. 2(14), which excludes assets held for business.

Sec. 10(38) infers the only other condition, that such transaction should have been chargeable to STT. Where the Fund has paid STT as certified by it, it is clear it was put through a recognised stock exchange. At any rate, the fact that the transaction has suffered STT spares tax on the long-term capital gains on sale or redemption of the units. A share or unit is a long-term capital asset, if held, for more than a year.

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