The good news is : Yes, the long term capital gains on sale of shares of companies or mutual funds on which securities transaction tax has been deducted is made tax free.
But , just note that instead of exemption being given like section 10(38) , now everyone who wants that tax not be paid on shares sold or mutual fund units sold by redemption or through stock exchange , can claim deduction euivalent to the income on such sale.
For example , let us say you held the shares for one year . You sold the shares through stock exchange. Let us say indexed cost of shares were Rs 20 and you sold for Rs 100. In that case , you will have to compute the gains as under
Sale consideration Rs 100
Less Cost (indexed) Rs 20
Gain Rs 80
Deduction as per section 51(2) Rs 80
Income from capital gains Rs NIL
Why is such method of allowing same exemption in form of deduction?
The purpose of allowing deduction not exemption , seems to me ,that Govt wants proper accounting of income in return itself. It wants that every tax payer must show the proper computation even if such income is not subject to tax while filing return of income . This will bring more transparency and control in terms of true reflection of ones affair in return of income.
Section 51 (2) of proposed Direct Tax Code 2010 is relevant
51. (2) In the case of transfer of an investment asset, being an equity share in a company or a unit of an equity oriented fund and such transfer is chargeable to securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004,—
(a) where the asset is held for a period of more than one year, (i) if the income computed after giving effect to sub-section (1) is a positive income, a deduction amounting to hundred per cent. of the income so arrived at shall be allowed;