The Return of LTCG Tax
Before 2018, Long-Term Capital Gains (LTCG) on listed equity shares were completely tax-free in India. However, the Union Budget of 2018 reintroduced LTCG tax at 10% (now 12.5%) for gains exceeding ₹1 lakh (now ₹1.25 lakh) in a year.
To protect investors who had bought shares years ago expecting them to be tax-free, the government introduced the Grandfathering Clause. "Grandfathering" simply means old gains made under the earlier tax-free rules are protected even after the rule changed.
Quick stat: Gains accrued up to 31 January 2018 are grandfathered (protected) using that day's Fair Market Value; only gains after this date are taxable (Source: Section 112A, Finance Act 2018).
What is Grandfathering?
The grandfathering clause ensures that any notional profit you made on your shares up to January 31, 2018, remains tax-free. You only pay tax on the gains made after this date.
How it Works: The FMV
To calculate your grandfathered cost, you need to know the Fair Market Value (FMV) of your shares on January 31, 2018. This is usually the highest price the share traded at on the stock exchange on that specific day.
The income tax rules provide a specific formula to determine your "Cost of Acquisition" for calculating LTCG:
Your revised Cost of Acquisition will be the higher of: 1. Your actual purchase price. 2. The lower of: - The FMV on January 31, 2018. - The actual Sale Price.
Let's look at an example: - You bought Reliance shares in 2015 for **₹500**. - The FMV on Jan 31, 2018, was **₹900**. - You sold the shares in 2025 for **₹1,500**.
Without grandfathering, your gain would be ₹1,000 (1500 - 500). With grandfathering, your revised cost is ₹900 (the FMV). Your taxable LTCG is only ₹600 (1500 - 900). The ₹400 gain made between 2015 and 2018 is protected!
Reporting in ITR
To claim this benefit, you must file ITR-2 or ITR-3. In Schedule 112A, you must provide trade-wise details for shares bought before Jan 31, 2018, including the ISIN, purchase price, sale price, and the FMV on the grandfathering date.
Simplify it with LastMinute ITR Finding the exact FMV for dozens of shares from 2018 is tedious. When you upload your broker's Tax P&L to LastMinute ITR, we help you parse the grandfathered costs automatically provided by your broker, giving you a clean summary to enter on the tax portal.
Start with LastMinute ITR · import your Tax P&L · fix an AIS mismatch.
What you should do
- Use the FMV on 31 Jan 2018 only for shares you bought on or before that date.
- Apply the higher-of / lower-of formula carefully, or rely on your broker's grandfathered cost column.
- Report trade-wise details in Schedule 112A of ITR-2 or ITR-3.
Common mistake
Using purchase price for old shares and overpaying. If you ignore the higher 31 Jan 2018 FMV, you tax gains that are legally protected. Always check whether the FMV gives you a higher cost base.