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LTCG Tax on Shares: The Grandfathering Rule and How to Compute It

By Vinoth Kanna Published 6 min read Guides · Taxation

Long-term capital gains on listed shares became taxable again in 2018. To avoid taxing gains that had accrued while the exemption was in force, the Finance Act, 2018 inserted a grandfathering clause into Section 112A — and that clause is the single most misunderstood piece of Indian equity taxation.

It is not an exemption. It is a redefinition of your cost of acquisition, and it applies only to shares bought on or before 31 January 2018. This chapter works through exactly how it computes.

The basic structure first

For listed equity shares and units of equity-oriented funds, where STT has been paid:

  • Holding period for long-term: more than 12 months
  • Taxed under: Section 112A
  • Exemption threshold: gains up to a specified limit in a financial year are not taxed; only the excess is
  • No indexation: Section 112A expressly denies indexation benefit on these gains

That last point surprises people who know indexation from property or debt. It does not apply here. Your cost is your cost, in nominal rupees — subject to the grandfathering adjustment below.

Short-term gains, meaning a holding period of 12 months or less, are taxed separately at a flat rate. The broader picture across segments is in our guide to tax on stock market gains in India.

What grandfathering actually does

Here is the problem the clause solves. Suppose you bought a share in 2012 at ₹100. By 31 January 2018 it was worth ₹400. You sell it today at ₹600.

Your economic gain is ₹500. But ₹300 of that accrued during a period when long-term gains were entirely exempt. Taxing the whole ₹500 would retroactively tax a gain the law had already exempted.

So Section 112A says: for shares acquired on or before 31 January 2018, your cost of acquisition is deemed to be the higher of your actual cost and a reference value derived from 31 January 2018 — but capped so the rule can never create an artificial loss.

The three-step computation

The statute expresses it as a nested comparison. Run it in this order.

Step 1 — Find the 31 January 2018 fair market value (FMV).

For a share listed on a recognised exchange on that date, the FMV is the highest quoted price on 31 January 2018. If the share was not traded that day, use the highest price on the immediately preceding date on which it was traded.

Note it is the highest price of the day, not the close. This is deliberately generous to the taxpayer.

Step 2 — Take the lower of the FMV and your actual sale price.

This is the cap that prevents the rule creating a loss. If the stock has fallen since January 2018, the FMV would otherwise inflate your cost above your sale price and manufacture a deductible loss out of nothing. Taking the lower of the two blocks that.

Step 3 — Take the higher of Step 2’s result and your actual purchase cost.

That is your deemed cost of acquisition.

Written as one expression:

Deemed cost = higher of ( actual cost , lower of ( 31-Jan-2018 FMV , sale price ) )

Four worked cases

Assume in each case the share was bought before 31 January 2018.

Case A — the stock rose throughout. Actual cost ₹100, FMV ₹400, sale ₹600.

Lower of (400, 600) = 400. Higher of (100, 400) = ₹400. Taxable gain ₹200. The ₹300 of pre-2018 appreciation is excluded, which is the point of the clause.

Case B — the stock fell after January 2018 but is still above cost. Actual cost ₹100, FMV ₹400, sale ₹250.

Lower of (400, 250) = 250. Higher of (100, 250) = ₹250. Taxable gain is nil. You neither pay tax nor book a loss, even though you made ₹150 economically.

Case C — the stock fell below cost. Actual cost ₹300, FMV ₹400, sale ₹250.

Lower of (400, 250) = 250. Higher of (300, 250) = ₹300. Loss of ₹50 — your real loss, correctly allowed. The FMV does not inflate it.

Case D — the stock fell between purchase and January 2018. Actual cost ₹500, FMV ₹400, sale ₹600.

Lower of (400, 600) = 400. Higher of (500, 400) = ₹500. Gain ₹100. Grandfathering does nothing here, correctly, because your actual cost was already above the reference value.

Case B is the one that catches people. A share you held through the 2018 peak and sold lower can produce a tax-neutral outcome — no gain to pay on, and no loss to set off either.

Where to find the 31 January 2018 FMV

You need the highest traded price for your exact scrip on that date. Three sources, in order of reliability:

  1. The exchange’s own bhavcopy for 31 January 2018. NSE and BSE both publish daily historical files carrying the day’s high per security. This is the primary record.
  2. Your broker’s capital gains statement. Most Indian brokers compute grandfathered cost automatically and show it on the statement. Worth cross-checking against the bhavcopy at least once.
  3. The AMC, for mutual fund units, which publishes 31 January 2018 NAVs for grandfathering purposes.

If a share was not listed on 31 January 2018 — a later IPO, for instance — grandfathering simply does not apply. Your actual cost stands. Shares bought after 31 January 2018 are likewise outside the clause entirely, regardless of when the company listed.

Three complications worth knowing

Bonus and split shares. If the shares you hold today arose from a bonus or split after 31 January 2018, the FMV comparison applies to the pre-adjustment holding, and the per-share figures need adjusting for the ratio. A 1:1 bonus halves the per-share FMV in the same way it halves the market price. Our guide to bonus issue versus stock split explains why that adjustment is arithmetic rather than discretionary.

Shares received as a gift or inheritance. Your cost of acquisition is the previous owner’s cost, and the holding period includes theirs. If they acquired the shares on or before 31 January 2018, grandfathering is available to you on their acquisition date.

Shares with no STT paid. Section 112A requires STT to have been paid on both acquisition and transfer, with specified exceptions for IPO allotments, bonus shares, rights and certain off-market acquisitions notified by the government. Where the conditions fail, the gain falls outside 112A, with a different rate and different indexation treatment.

Set-off and carry-forward

Long-term capital losses on shares can be set off against long-term capital gains only — not against short-term gains, and not against other heads of income. Unabsorbed long-term losses carry forward for eight assessment years, and carry forward only if you filed your return by the due date.

This is why Case C above is worth computing properly rather than approximating: an allowed loss is an asset with an eight-year life.

The honest summary

Grandfathering is a cost-basis rule, not a relief. It asks one question — what was this share worth on 31 January 2018? — and uses the answer to protect gains that accrued under the old exemption, while refusing to manufacture losses that never happened.

Two things to carry away. Use the highest price of 31 January 2018, not the close. And run the comparison in the stated order, because taking the lower before the higher is the entire safeguard: reverse them and you will compute a loss the statute does not allow.

Rates and thresholds under Section 112A have been revised more than once since 2018. The computation method described here is structural and has not changed; the rate and the exemption threshold should be checked against the current Finance Act before you file.

LTCGCapital GainsGrandfatheringTaxationIndian Stock Market