The 31 January 2018 grandfathering rule: two steps, and most people only do one of them

If you have held listed shares or equity mutual funds since before 1 February 2018, your cost of acquisition for tax purposes is not what you paid for them.

It is the result of a two-step calculation — and most people perform only the first step.

# Why the rule exists

Before Budget 2018, long-term gains on listed equity were exempt. When Section 112A made them taxable, the appreciation already earned up to that point would otherwise have become taxable retrospectively.

Grandfathering prevents that. The intention is simple: tax the appreciation from 31 January 2018 onwards, not before it.

# The two steps

Step 1:  V1  = LOWER of (FMV on 31 Jan 2018, actual sale price)
Step 2:  COA = HIGHER of (V1, actual purchase price)

LTCG = Sale price − COA − transfer expenses

The second step is the one that gets skipped.

# Why each step is there

Step 1 — the lower-of exists to stop the rule creating an artificial loss.

Without it, someone whose share stood at ₹250 in January 2018 and later sold at ₹180 could substitute ₹250 as cost and claim a ₹70 loss — despite having originally paid ₹100 and made no real loss at all.

Step 2 — the higher-of protects you. It ensures the substituted value never drags your cost below what you actually paid, so a genuine loss remains a genuine loss.

# Four cases, worked

Taking cost ₹100, FMV on 31 Jan 2018 of ₹250:

Rows three and four are exactly where a one-step calculation goes wrong. In row three, stopping at step 1 would show a loss of nil instead of the real ₹20 loss. In row four it would overstate the gain by ₹50.

# What it is actually worth

A realistic case. Shares bought in 2012 for ₹2,00,000, worth ₹8,50,000 on 31 January 2018, sold now for ₹14,00,000:

V1  = lower of (8,50,000 , 14,00,000)  = ₹8,50,000
COA = higher of (8,50,000 , 2,00,000)  = ₹8,50,000

LTCG                = 14,00,000 − 8,50,000 = ₹5,50,000
less ₹1,25,000 exempt                      = ₹4,25,000
tax at 12.5%                               = ₹53,125

Without grandfathering the gain would have been ₹12,00,000, and the tax ₹1,34,375.

Grandfathering saved ₹81,250 on this single holding.

# Scrip-wise reporting means scrip-wise computation

Schedule 112A in the ITR requires these gains to be reported scrip by scrip — each holding separately, with its own cost, fair market value and sale details.

# The rate and exemption

Grandfathering determines how the gain is computed. The rate and exemption then apply to whatever gain results — they are separate steps and should not be mixed into one calculation.

# What it does not cover

• Unlisted shares — no grandfathering under 112A
• Property — separate rules, and resident individuals and HUFs have a separate 12.5% versus 20%-with-indexation choice
• Gold, debt funds — their own treatment
• Anything acquired on or after 1 February 2018 — actual cost, no substitution

# What to do

1. List every holding acquired on or before 31 January 2018 — shares and equity funds
2. Get the correct FMV for each — highest quoted price on 31 Jan 2018, or NAV for funds
3. Run both steps for each holding, not just the first
4. Check row three of the table above — if any holding is below your original cost, step 2 is what preserves your real loss
5. Keep the working scrip-wise, because Schedule 112A will ask for it that way
6. Apply the ₹1.25 lakh exemption at the end, across all such gains for the year

Written by

Prabhakar Kumar

Chartered Accountant (ICAI, Nov 2019)

Founder of VittSphere Technologies. Practicing CA serving 200+ MSME clients across Pune. 86% win-rate at AO and CIT(A) level tax appeals. Writes on Indian taxation, capital gains, and personal finance.