Securities Transaction and Grandfathering of LTCG

For 14 years, long-term gains on listed Indian shares were entirely tax-free. When the government brought back LTCG tax on equities in Budget 2018, it faced a fairness problem: taxing decades of past gains overnight would be punitive. The solution was grandfathering — a clever cut-off that taxes only future gains.

How Grandfathering Works

Under Section 112A, gains accrued up to 31 January 2018 are protected. For shares and equity mutual fund units bought before 1 February 2018, the cost of acquisition is recalculated using a special rule: it's taken as the higher of the actual purchase price, or the fair market value (the highest price) on 31 January 2018 — capped at the actual sale price. In effect, the appreciation up to that date escapes tax, and only the gain *after* 31 January 2018 is taxed when you eventually sell.

The Current Tax Rate

The LTCG regime has since been tightened. For listed equity and equity-oriented funds held over 12 months, long-term gains are now taxed at 12.5%, with an annual exemption (raised to ₹1.25 lakh) on the gains. This applies on top of the Securities Transaction Tax (STT) you already pay on every market trade — the small levy collected at source on equity buy/sell and F&O transactions that makes a holding eligible for the concessional capital-gains treatment.

Why It Matters to You

If you hold shares or equity funds bought before February 2018, grandfathering can meaningfully cut your tax bill — but you must use the correct grandfathered cost, not your original purchase price, when computing gains in your ITR. Brokers and AMCs usually provide the 31 January 2018 reference values. Getting this right is the difference between overpaying tax and claiming the protection Parliament intended. For long-term equity investors, grandfathering plus the annual exemption remains one of the most valuable features of India's capital-gains framework.