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Capital Gains (Securities)

The grandfathered cost of listed shares you bought before 2018

For shares bought before February 2018, the cost is a special grandfathered figure, not simply what you paid.

You are selling listed Indian shares, or equity mutual funds, that you have held since before February 2018, and you want to compute the gain correctly. There is a specific rule for these, grandfathering, that protects the gains you had built up by 31 January 2018 from tax. It means your cost for the calculation is not just the price you paid, it is a special figure that uses the value on that date. Getting the formula right, and knowing the NRI-specific limit on it, is what keeps you from over or under paying. Here is how it works.
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Last reviewed: 26 July 20266 min readReviewed by Preetesh Maloo, CA

The short answer

For listed shares or equity mutual funds bought before 1 February 2018, your cost for computing the long-term gain is grandfathered: it is the higher of what you actually paid and the lower of the fair market value on 31 January 2018 and your sale price. That protects the gains you had built up by that date, though it can only reduce a gain, it cannot create a loss. This still applies under the current 12.5% long-term rate, with the ₹1.25 lakh annual exemption. As an NRI, note that you cannot combine grandfathering with the foreign-currency computation used for shares, so you compute in rupees with the grandfathered cost.

References on this page

  • For listed shares/equity funds bought before 1 Feb 2018, cost = higher of actual cost and lower of (31 Jan 2018 fair market value, sale price)
  • Grandfathering can reduce a gain but cannot create a loss (the sale-price cap)
  • It still applies under the 12.5% long-term rate, with the ₹1.25 lakh exemption (Section 112A)
  • An NRI cannot combine grandfathering with the foreign-currency (first proviso to Section 48) computation

The grandfathering formula

When long-term gains on listed shares became taxable again in 2018, the law protected the gains that had already accrued up to 31 January 2018 by adjusting the cost. So for shares or equity mutual funds you bought before 1 February 2018, your cost of acquisition for the gain calculation is not simply what you paid. It is the higher of two things: your actual cost, and the lower of the fair market value on 31 January 2018 and the price you sell at.

Work through it and the effect is clear. If the share had risen a lot by 31 January 2018, that higher 31-January value becomes your cost, so the gain from before that date is not taxed. But the formula caps the 31-January value at your sale price, which stops you manufacturing a loss where there is a real gain. So grandfathering can wipe out a gain, but it can never turn a genuine profit into a deductible loss. This is the sub-rule people most often get wrong, taking the raw 31-January value without the sale-price cap.

Still current, and the NRI forex trap

Grandfathering has survived the recent changes. Even though long-term gains on listed equity are now taxed at 12.5%, up from 10%, and the annual exemption is ₹1.25 lakh, the grandfathering of pre-2018 shares under Section 112A continues unchanged. So for an old holding you still start from the grandfathered cost, take the ₹1.25 lakh exemption, and pay 12.5% on the rest.

There is an NRI-specific trap. NRIs who buy Indian shares in foreign currency have a separate relief that computes the gain in that currency to strip out rupee movement. But that foreign-currency computation and the Section 112A grandfathering do not combine; they are mutually exclusive. So an NRI selling pre-2018 listed shares computes the gain in rupees using the grandfathered cost, with the ₹1.25 lakh exemption and the flat 12.5%, and does not also get the currency protection. Choosing to work it the wrong way, or trying to claim both, produces a figure the tax office will not accept. A practising CA computes the grandfathered cost correctly, applies the exemption, and confirms the right basis for your holding.

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What's involved

What the CA actually does

  1. 1

    We compute the grandfathered cost

    We work the cost as the higher of your actual cost and the lower of the 31 January 2018 value and the sale price, so the pre-2018 gain is protected without creating a false loss.

  2. 2

    We apply the exemption and rate

    We take the ₹1.25 lakh long-term exemption and the 12.5% rate, so the tax on an old holding is right and not overstated.

  3. 3

    We get the basis right for an NRI

    We confirm that you use the rupee grandfathered computation, not the foreign-currency one, since the two cannot be combined.

  4. 4

    We source the 31 January value

    We obtain the correct 31 January 2018 fair market value for each holding, the highest quoted price or the NAV, so the cost is defensible.

What to have ready

Documents you'll typically need

  • The shares or funds and their original purchase dates and cost
  • The 31 January 2018 fair market value for each holding
  • The sale price and date
  • Your PAN and residency details

Your destination country can change the details

Requirements differ from one consulate, university and visa route to the next — how recent the figures must be, how long funds must have been held, and which certificates are mandatory. We assemble the documents around the exact checklist you're applying under. To see how India's tax treaty with your country of residence affects related filings, set your country below or compare all 31 countries.

Frequently asked questions

Common questions

Related

If this matched your situation, these go further

The forex rule on Indian shares: computing your gain in your own currencyWhen your Indian shares are merged or demergedWhen your share loss is disallowed: dividend and bonus strippingNRI ITR filing (we file for you)DTAA TDS recoveryStocks / equity redemption coordinationCapital gains calculatorForm 10F generator

Selling listed shares you have held since before 2018?

Send us the holdings. A practising CA will compute the grandfathered cost correctly on a free call, no obligation.

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