What is Grandfathering? How are Long-Term Capital Gains (LTCG) treated under the Grandfathering provisions?
A Grandfather clause is a provision in which old rules continue to apply to certain existing conditions while new rules will apply to all future cases. Those exempt from the new rules are said to have grandfathered rights or to have been grandfathered in.
The Finance Bill 2018 reintroduced the Long Term Capital Gains (LTCG) tax on gains from the sale of listed equity shares and equity-oriented mutual funds.
- With effect from 1st April 2018, LTCG arising from the sale of equity shares and equity-oriented mutual funds held for more than 12 months in excess of Rs. 1 lakh in a financial year is taxable at 10%.
- Under the bill, Grandfathering is a provision that states that LTCG made up to 31 January 2018 will not be taxable.
How to determine your Cost of Acquisition (COA)/Acquisition Cost as per Provisions of the Grandfathering Clause
Cost of Acquisition/Acquisition Cost refers to expenses/costs incurred to purchase a capital asset (equity, equity-oriented mutual funds).
As per the grandfathering provisions, the COA of equity and equity-oriented mutual funds are taken as the higher of:
1. The Purchase Price
OR
2. The lower of:
- The Fair Market Value (FMV) of investments as on 31st January 2018, i.e., the highest traded price on 31st January 2018, AND
- The Sale Value
Let us look at a few scenarios:
Scenario A. The FMV (on 31st Jan 2018 ) is higher than the original purchase value
Particulars | Quantity | Rate | Value |
| Purchase- 1st Jan 2015 | 1,000 | Rs. 200 | Rs. 2,00,000 |
| Sale- 19th May 2018 | 1,000 | Rs. 300 | Rs. 3,00,000 |
| Profit = Sale Price - Purchase Price | Rs. 1,00,000 | ||
| FMV- 31st Jan 2018 | 1,000 | Rs. 250 | Rs. 2,50,000 |
Step 1. Calculate the COA: This will be the higher of (a) and (b)
Particulars | Amount | Amount |
| (a) Purchase Value | Rs. 2,00,000 | |
| (b) Lower of (i) and (ii) | Rs. 2,50,000 | |
(i) FMV | Rs. 2,50,000 | |
(ii) Sale Value | Rs. 3,00,000 | |
| Final COA | Rs. 2,50,000 |
Step 2. Determine your LTCG
Particulars | Amount |
| Sale Value | Rs. 3,00,000 |
| COA | Rs. 2,50,000 |
| LTCG | Rs. 50,000 |
Hence, LTCG tax will be applicable on the gain of Rs. 50,000.
Scenario B. FMV (on 31st Jan 2018) is lower than the original purchase value
Particulars | Quantity | Rate | Value |
| Purchase- 1st Jan 2015 | 1,000 | Rs. 200 | Rs. 2,00,000 |
| Sale- 19th May 2018 | 1,000 | Rs. 300 | Rs. 3,00,000 |
| Profit = Sale Price - Purchase Price | Rs. 1,00,000 | ||
| FMV- 31st Jan 2018 | 1,000 | Rs. 150 | Rs. 1,50,000 |
Step 1. Calculate the COA: This will be the higher of (a) and (b)
Particulars | Amount | Amount |
| (a) Purchase Value | Rs. 2,00,000 | |
| (b) Lower of (i) and (ii) | Rs. 1,50,000 | |
(i) FMV | Rs. 1,50,000 | |
(ii) Sale Value | Rs. 3,00,000 | |
| Final COA | Rs. 2,00,000 |
Step 2. Determine your LTCG
Particulars | Amount |
| Sale Value | Rs. 3,00,000 |
| COA | Rs. 2,00,000 |
| LTCG | Rs. 1,00,000 |
Hence, LTCG tax will be applicable on the gain of Rs. 1,00,000.
Scenario C. Sale value is lower than the original purchase price and FMV (on 31st Jan 2018)
Particulars | Quantity | Rate | Value |
| Purchase- 1st Jan 2015 | 1,000 | Rs. 200 | Rs. 2,00,000 |
| Sale- 19th May 2018 | 1,000 | Rs. 150 | Rs. 1,50,000 |
| Profit = Sale Price - Purchase Price | Rs. -50,000 | ||
| FMV- 31st Jan 2018 | 1,000 | Rs. 180 | Rs. 1,80,000 |
Step 1. Calculate the COA: This will be the higher of (a) and (b)
Particulars | Amount | Amount |
| (a) Purchase Value | Rs. 2,00,000 | |
| (b) Lower of (i) and (ii) | Rs. 1,50,000 | |
(i) FMV | Rs. 1,80,000 | |
(ii) Sale Value | Rs. 1,50,000 | |
| Final COA | Rs. 2,00,000 |
Step 2. Determine your LTCG
| Particulars | Amount |
| Sale Value | Rs. 1,50,000 |
| COA | Rs. 2,00,000 |
| LTCG | - Rs. 50,000 |
Long-Term Capital Losses (LTCL) arising from a sale made on or after 1st April 2018 can be set off or carried forward under existing provisions of the Income Tax Act.
To get your holding statement in accordance with the grandfathering clause and closing rates as on 31 January 2018, please send an email to [email protected] from your registered email ID.Still need help? Create Ticket
