Finance Act, 2017 (‘Finance Act’) had amended Section 10(38) of Income Tax Act, 1961 (‘ITA’) to withdraw the long-term capital gains tax exemption available on transfer of listed equity shares acquired on or after October 1, 2004 and which were not chargeable to Securities Transaction Tax (‘STT’). However, the Central Government was authorized to carve out those transactions, which would not lose the capital gains tax exemption, by issuing a notification in that regard.

In pursuance thereof, the Central Board of Direct Taxes (‘CBDT’) has issued a notification dated June 5, 2017 listing both, i.e. the transactions which will lose exemption and also those transactions which will not lose the exemption, as per details below:

i. Acquisition of existing listed equity shares in a company, whose equity shares are not frequently traded in a recognized stock exchange of India, which are made through a preferential issue. However, the following acquisition of listed equity shares (even if made through a preferential issue) are protected and continue to be covered by Section 10(38) exemption:

a. Acquisition of shares which has been approved by the Supreme Court (‘SC’), High Court (‘HC’), NCLT, SEBI or RBI in this behalf;

b. Acquisition of shares by any non-resident in accordance with foreign investment guidelines;

c. Acquisition of shares by an Investment fund or a Venture Capital Fund or a QIB; and

d. Acquisition of shares through a preferential issue to which the provisions of Chapter VII of the ICDR Regulations do not apply.

ii. Transactions for acquisition of existing listed equity shares in a company which are not entered through a recognized stock exchange. However, the following acquisitions of listed equity shares are protected (even if not made through a recognized stock exchange) and continue to be covered by Section 10(38) exemption.

a. Acquisition through an issue of share by a company other than preferential issue, as an example receipt of bonus shares, shares upon conversion of instruments or splitting of shares;

b. Acquisition by scheduled banks, reconstruction or securitization companies or public financial institutions during their ordinary course of business;

c. Acquisition which has been approved by the SC, HCs, NCLT, SEBI or RBI in this behalf;

d. Acquisition under employee stock option scheme or employee stock purchase scheme framed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;

e. Acquisition of shares by any non-resident in accordance with foreign investment guidelines;

f.  Acquisition of shares under SAST Regulations;

g. Acquisition from the Government;

h. Acquisition of shares by an Investment fund or a Venture Capital Fund or a QIB; and

i. Acquisition by mode of transfer referred to in Sections 47 or 50B of the ITA if the previous owner of such shares has not acquired them by any mode which is not eligible for exemption as per this notification.

iii. Acquisition of equity shares of a company during the period of its delisting from a recognized stock exchange.