What is the grandfathering rule for capital gains under Section 112A?

Income Tax Income from Capital Gains
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Let’s rewind to pre-2018.

Back then, long-term capital gains (LTCG) from listed shares and equity mutual funds were completely tax-free in India. No tax, just clean profits — it was a good time to be an equity investor.

But then came Budget 2018, and things changed.

From 1 April 2018, any LTCG exceeding ₹1 lakh became taxable at 10% under Section 112A.

:light_bulb: LTCG on equity investments is now taxed at 12.5%, and the exemption limit has been increased to ₹1.25 lakh.

This naturally raised a big question:

“What about the gains people had already made before 1 April 2018?”

That’s where the grandfathering rule comes in — a provision that ensures older gains aren’t unfairly taxed just because the law changed later.

So what does this rule actually say?

The grandfathering rule protects your profits made before 31 January 2018.

:light_bulb: While the 10% tax was levied from 1 Apr 2018, the grandfathering rule applies to assets purchased before 31 Jan 2018. This is because the budget was announced on 1 Feb 2018, so any equity assets bought before the budget date are eligible for grandfathering.

In simple terms, if you had bought shares or equity mutual funds before that date, any gain up to 31 Jan 2018 would not be taxed — even if you sold the investment after the new rule kicked in.

So when calculating your LTCG, the cost of acquisition (COA) will be adjusted — not based on your original purchase price, but on the Fair Market Value (FMV) as of 31 January 2018.

But here’s where it gets a little technical.

Adjusted cost of acquisition (COA) = higher of:

:one: Your original purchase price

:two: The lower of:

– Fair Market Value (FMV) as on 31 Jan 2018

– Actual sale price

Adjusted cost of acquisition
Adjusted cost of acquisition1200×526 13.2 KB

This formula ensures you don’t pay tax on gains made before the law changed, but also prevents any artificial inflation of the COA if prices dropped.

Let’s break it down with an example:

  • You bought shares for ₹150 in 2016 (original purchase price)
  • On 31 Jan 2018, they were worth ₹220 (FMV)
  • You sold them later for ₹300 (sale price)

In this case, the original COA = ₹150

But as per grandfathering rule, the adjusted COA would be = ₹220

Hence, your capital gain will be just ₹80 (₹300 – ₹220), and the ₹70 gains before 2018 are grandfathered, or protected from taxes.

If any questions, let us know!

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