Pre-Budget 2018, equity LTCG on listed shares was 0% (with STT paid). Budget 2018 introduced 10% LTCG (now 12.5% post-Budget 2024). To soften the transition, the government grandfathered gains up to January 31, 2018 — your cost basis steps UP to the fair market value on that date. Most long-term holders don't realise how much this saves them.
How grandfathering works (Section 112A)
For shares acquired BEFORE Feb 1, 2018, your COST OF ACQUISITION for LTCG purposes = HIGHER OF:
- Actual cost of acquisition
- LOWER of:
- Fair Market Value on January 31, 2018
- Sale consideration
Effectively: pre-2018 gains escape tax. Only post-Jan-31-2018 appreciation is taxable.
Worked example — Reliance Industries
Bought 100 shares in 2010 at ₹500. Jan 31, 2018 FMV: ₹950. Sold in 2026 at ₹2,800.
WITHOUT grandfathering:
- Sale: ₹2.8 lakh
- Cost: ₹50k
- Gain: ₹2.3 lakh
- LTCG tax: 12.5% × (2.3L − 1.25L exemption) = ₹13,125
WITH grandfathering:
- Sale: ₹2.8 lakh
- Stepped-up cost: max(₹50k, min(₹95k, ₹2.8L)) = ₹95k
- Gain: ₹1.85 lakh
- LTCG tax: 12.5% × (1.85L − 1.25L) = ₹7,500
Savings: ₹5,625 on this single trade. Scale across a portfolio held since pre-2018 — savings can be ₹50k-5L per year for active long-term investors.
The grandfathering matters most for...
- Bluechip compounders held 7+ years (HDFC Bank, TCS, Asian Paints, Pidilite)
- Bonus + split shares from pre-2018 (entire history counts)
- Bequest / inheritance — predecessor's acquisition date carries over
- Demerged / merged share holdings — proportional cost step-up applies
Where to find Jan 31, 2018 FMV
Most Indian broking platforms (Zerodha Console, Groww, Upstox) auto-populate Jan 31, 2018 FMV when computing realised LTCG for pre-2018 holdings. Verify against:
- NSE/BSE historical price archive for Jan 31, 2018
- AIS (Annual Information Statement) from IT department
- Capital gains statement from broker (year-end)
The bonus / split / demerger complication
If you got bonus shares (1:1, 1:2, etc.) post-Jan-31-2018 on pre-2018 holdings, the bonus shares inherit the parent's grandfathered cost proportionally.
Example: 100 Reliance shares pre-2018 (Jan 2018 FMV ₹950 each). 1:1 bonus in 2017. Total 200 shares, cost stepped up to ₹95k for the original 100 + ₹0 for bonus (if pre-2018 bonus, FMV applies). Sale of all 200 at ₹2,800 = ₹5.6L total. Gain calc = ₹5.6L − ₹95k − ₹0 = ₹4.65L. Better than gain on full ₹50k cost.
Demergers + splits: cost allocation based on demerger ratios. Brokers compute this automatically; verify in tax statements.
What grandfathering does NOT apply to
- Shares acquired ON or AFTER Feb 1, 2018 (no step-up; actual cost only)
- Unlisted equity (no Section 112A; uses 20% LTCG with indexation till sale)
- Debt mutual funds (no LTCG since April 2023; slab rate only)
- Real estate (different grandfathering rules — Budget 2024 introduced separate cost step-up)
- Crypto / VDA (no grandfathering ever; flat 30%)
Filing in ITR
Schedule 112A of ITR-2 or ITR-3:
- Symbol + ISIN + sale date + quantity
- Actual cost of acquisition
- FMV on Jan 31, 2018 per share
- Sale consideration
- System auto-computes the higher-of formula
Mistakes here trigger AIS mismatches → IT scrutiny. Triple-check the FMV values for each pre-2018 holding.
The compounder strategy implication
Grandfathering rewards long-term holders. A 12% CAGR stock bought in 2010 has 8 years of pre-2018 compounding tax-free + only 8 years of post-2018 taxable gain. Effective tax drag = ~5.5% vs the full 12.5% on a new buy.
This is why selling a long-held compounder for marginal valuation reasons is often suboptimal — you lose the grandfathered cost basis and the next holding starts from scratch with full LTCG exposure.
Use the Capital Gains calculator with stepped-up cost basis to model your specific situations. Pair with post-Budget 2024 capital gains guide for current rates.