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
Bonus shares need date-specific handling. Bonus shares already held on January 31, 2018 can use the FMV grandfathering rule. Bonus shares allotted after January 31, 2018 generally have zero cost and their own holding period from allotment date. Splits preserve cost and holding period; demergers allocate cost as per the scheme.
Example: 100 Reliance shares pre-2018 (Jan 2018 FMV ₹950 each). 1:1 bonus in 2017. Total 200 shares were already held on Jan 31, 2018, so each line can use the applicable FMV/cost formula. A post-2018 bonus would not get that same step-up.
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.