Grandfathering Clause for LTCG: Formula and Loss Examples

The grandfathering clause for LTCG protects earlier gains on qualifying long-term equity holdings acquired before 1 February 2018. LTCG means long-term capital gains. The cost used for tax is the higher of actual cost and the lower of fair market value and sale value. For a listed share, fair market value normally means its highest quoted price on 31 January 2018. A genuine loss below your original cost can remain; the rule does not erase every loss.

The formula: do the lower comparison first

Write the calculation as: deemed cost = higher of [actual cost, lower of (fair market value, sale consideration)]. Deemed cost means the purchase cost used for tax. Sale consideration means the amount received or receivable for the asset. Keep all amounts on the same basis: per share throughout, or the matching total holding throughout.

• First compare the fair market value with the sale value and keep the lower amount.
• Then compare that result with actual cost and keep the higher amount.
• Subtract the resulting cost from sale value to find the gain or loss before any separately allowable transfer expenses.

Reversing those comparisons changes the answer when sale value is below actual cost. A shortcut that caps the entire cost at sale value would incorrectly turn a real capital loss into zero. The numerical cases below show why that matters.

Step by step for your own holding

1. Confirm the shares or fund units were acquired before 1 February 2018.
2. Find your actual purchase cost per share, including any corporate-action adjustments.
3. Find the 31 January 2018 value: the highest quoted price for a listed share that traded that day.
4. Find your sale price per share.
5. Take the lower of the 2018 value and the sale price.
6. Take the higher of that result and your actual cost. This is your deemed cost.
7. Subtract deemed cost from the sale price.

Do this share by share or lot by lot if you bought at different prices. A single average cost can hide that one lot is grandfathered differently from another.

Which assets and dates qualify?

Section 90(7) of the Income-tax Act, 2025 covers specified long-term equity shares, equity-oriented fund units and business-trust units referred to in Section 198, acquired before 1 February 2018. It is not a general cost adjustment for every asset bought long ago. Check the asset and relevant tax conditions before applying it.

The new Act applies from 1 April 2026. Earlier tax periods continue under the previous Act, as the Income Tax Department explains in its transition FAQ. Older articles refer to Section 55(2)(ac) and Section 112A of the Income-tax Act, 1961. Use the legislation and return forms for the period you are reporting.

Highest price, closing price or mutual-fund NAV?

Save the source of the value with your purchase and sale records. If two reports disagree, compare the security identifier, quantity and valuation method before using either result. A figure headed closing price is not enough to establish the required highest price.

Worked examples, including a genuine loss

These are made-up per-share examples for an otherwise eligible long-term holding. Assume actual cost of ₹120 and fair market value of ₹200. The sale prices below are alternative scenarios, not historical prices or suggested exits. Fees and the investor’s other gains are excluded.

In the final case, the lower comparison gives ₹90, but actual cost is still ₹120. The higher comparison therefore preserves ₹120 as cost. The ₹30 loss comes from selling below the amount originally paid. It is not a loss created by substituting the higher fair market value.

For a separate made-up quantity of 150 shares sold at the first scenario’s ₹260, gain before expenses is ₹60 × 150 = ₹9,000. This is a gain calculation, not a complete tax bill. The annual aggregate, losses and personal tax circumstances still need checking.

Two more cases: sale below fair value and a whole holding

Use the same invented base as above: actual cost ₹120 and 31 January 2018 value ₹200. Suppose you sell at ₹150. The lower of ₹200 and ₹150 is ₹150. The higher of ₹120 and ₹150 is ₹150. Deemed cost is ₹150, so the gain is ₹150 − ₹150 = ₹0. The ₹30 of growth above your cost is not taxed because the sale price sits below the 2018 value.

Now a whole holding. Take 100 shares sold at ₹260. Economic gain over your actual cost is (₹260 − ₹120) × 100 = ₹14,000. Taxable gain under the rule is (₹260 − ₹200) × 100 = ₹6,000. The ₹8,000 difference is the growth up to 31 January 2018 that the rule leaves out. These numbers are an example, not a tax computation.

Grandfathered gain and tax payable are different steps

As checked on 16 October 2026, Section 198 specifies a base rate of 12.5% on qualifying aggregate long-term gains exceeding ₹1,25,000. The threshold applies to the relevant combined gains, rather than separately to each stock. Securities Transaction Tax conditions, notified acquisition exceptions and resident basic-exemption adjustments can matter. Applicable cess and surcharge are additional; this page does not calculate an individual tax liability.

Use the long-term capital gains explanation for the broader subject. The capital gains versus business income guide covers a different question: which income category applies. Do not transfer this old-equity cost rule to an options trade just because both trades appear in the same trading account.

What grandfathering does not cover

• Shares and fund units bought on or after 1 February 2018. They use their actual cost.
• Gains that arose after 31 January 2018. Only the earlier appreciation is protected.
• Intraday, futures and options trades. They fall under different income rules, so this old-equity cost rule does not apply.
• Assets that are not specified long-term equity shares, equity-oriented fund units or business-trust units.
• Short-term holdings. The clause concerns long-term gains.

Whether a gain is long term depends on the holding period set by the law for that asset. Check the period that applies to your sale date with a chartered accountant (CA).

Common mistakes

• Using the closing price on 31 January 2018 instead of the highest quoted price.
• Applying the higher of cost and fair value without comparing against the sale price first.
• Forgetting that bonus shares and splits change per-share cost and value.
• Keeping no record of the 2018 value, then rebuilding it from memory at filing time.
• Mixing units: a per-share value against a total holding amount.

Why this rule exists

Before 1 April 2018, long-term gains on listed equity were not taxed. When they became taxable, the law protected the appreciation that had already built up to 31 January 2018. That is why the cut-off date sits in the formula. The rule is a transition measure, so its effect fades as older holdings are sold.

If you trade actively, keep this separate from your trading records. See long-term capital gains tax, capital gains versus business income and the journal and tax records guide. Tax rules change, so confirm with a CA before filing.

Records that make the calculation checkable

• Purchase evidence showing acquisition date, price and quantity.
• The valuation-date source for the identified share or fund unit.
• Sale evidence and any transfer-expense records kept separately from price.
• Corporate-action records where the holding changed through a split, bonus, merger or transfer.
• A reconciliation with the tax report and the return for the correct period.

OneTradeJournal can hold manually entered trade notes, but a journal entry is not proof of a statutory acquisition cost. Keep the underlying documents. For reporting preparation, see the trading journal and tax records guide, and have a qualified tax adviser check unusual holdings.

Grandfathering questions

Sources

• Income Tax Department: statutory cost rule (checked 16 October 2026).
• Income-tax Act with current amendments (checked 16 October 2026).
• Income Tax Department: transition FAQ (checked 16 October 2026).