Tax
Grandfathering of Equity Gains: The 31 Jan 2018 Rule
Equity gains accrued up to 31-01-2018 are protected from tax under the grandfathering rule. Here is how the cost of acquisition is worked out, with three examples.
IntelliWealthPro Team· Research desk· · 5 min read
Key takeaways
- Gains on listed equity and equity fund units accrued up to 31-01-2018 are protected under grandfathering.
- Cost = higher of actual cost and the lower of (FMV on 31-01-2018, sale value).
- For most mutual fund units, FMV is the NAV on 31-01-2018, available in AMFI's NAV history.
- Each SIP instalment is checked on its own purchase date; FIFO decides which units are sold.
- Rules are as of FY 2025-26; verify with a tax professional.
On this page
Before April 2018, long-term gains on listed equity shares and equity-oriented mutual funds were exempt under Section 10(38). Budget 2018 removed that exemption and introduced Section 112A from 01-04-2018. To avoid taxing gains that had already built up under the old regime, the law added a grandfathering rule: gains accrued up to 31-01-2018 stay protected.
Rules described here are as of FY 2025-26. Verify with a tax professional before filing.
Who the grandfathering rule applies to
Grandfathering applies when all of these are true:
- The asset is a listed equity share or a unit of an equity-oriented mutual fund (at least 65% in domestic listed equity).
- It was acquired before 01-02-2018.
- It is sold as a long-term capital asset under Section 112A, meaning held more than 12 months, with STT paid as required.
It does not apply to debt funds or to equity units bought on or after 01-02-2018.
The cost of acquisition formula
For qualifying assets, the cost of acquisition is the higher of:
- the actual cost of acquisition, and
- the lower of:
- the fair market value (FMV) on 31-01-2018, and
- the full value of consideration (sale value).
Written compactly:
Cost = max( actual cost, min( FMV on 31-01-2018, sale value ) )
The "lower of" step stops the FMV from creating an artificial loss. The "higher of" step makes sure an investor never ends up with a cost below what they actually paid.
What counts as FMV
- Listed equity shares: the highest price quoted on a recognised stock exchange on 31-01-2018.
- Units not listed on an exchange (most mutual fund units): the NAV on 31-01-2018.
- Listed units (for example, ETFs): the highest price on a recognised exchange on that date.
If there was no trading on 31-01-2018, the rules refer to the most recent trading day before it; confirm specifics with a tax professional for such cases.
Three worked examples (hypothetical)
Assume each case is 1,000 units of an equity-oriented fund bought before 01-02-2018 and sold in FY 2025-26 as long-term. Figures are illustrative, not drawn from any real scheme.
| Case | Actual cost (₹) | Value on 31-01-2018 (₹) | Sale value (₹) | Lower of FMV and sale (₹) | Cost used (₹) | Gain / loss (₹) |
|---|---|---|---|---|---|---|
| 1. NAV rose after 2018 | 1,00,000 | 1,50,000 | 2,40,000 | 1,50,000 | 1,50,000 | Gain 90,000 |
| 2. Sale below FMV, above cost | 1,00,000 | 1,50,000 | 1,30,000 | 1,30,000 | 1,30,000 | Zero |
| 3. Sale below actual cost | 1,00,000 | 1,50,000 | 90,000 | 90,000 | 1,00,000 | Loss 10,000 |
Case 1: the value kept rising
The lower of FMV (₹1,50,000) and sale value (₹2,40,000) is ₹1,50,000. That is higher than the actual cost, so the cost becomes ₹1,50,000. Only the ₹90,000 earned after 31-01-2018 is taxable. The ₹50,000 accrued before the cut-off is protected.
Case 2: sold below the 2018 value but above cost
The lower of FMV and sale value is the sale value, ₹1,30,000. That beats the actual cost, so cost equals sale value and the gain is zero. The investor made money compared with what they paid, but none of it is taxed, because all of it accrued before the cut-off.
Case 3: sold below actual cost
The lower of FMV and sale value is ₹90,000, which is below the actual cost of ₹1,00,000. The higher of the two is the actual cost, so the investor records a long-term capital loss of ₹10,000, which can be set off only against long-term gains.
Tax rate after grandfathering
Once the cost is worked out, the gain is taxed under Section 112A:
- 12.5% on long-term gains above ₹1.25 lakh per financial year, for transfers on or after 23-07-2024.
- Earlier, 10% above ₹1 lakh.
- Surcharge and 4% health and education cess apply on top.
The ₹1.25 lakh limit is shared across all Section 112A gains for the year. For the wider picture, read our guide to capital gains tax on mutual funds.
Practical notes for mutual fund investors
FIFO decides which units are sold
Units are redeemed first-in, first-out. A partial redemption in an old folio will usually consume the oldest units first, which are often the grandfathered ones.
SIP instalments are checked one by one
A SIP that started in 2016 and continued into 2019 has some instalments before 01-02-2018 and some after. Only the earlier instalments get grandfathered cost; later ones use actual cost. A single redemption can therefore mix both treatments.
Switches count as sales
A switch from one scheme to another is a redemption from the source scheme. If the units were bought before 01-02-2018, grandfathering applies to that switch, and the new units in the target scheme start fresh with their switch-in date and cost.
Bonus units and IDCW reinvestment
Bonus units and IDCW reinvestment units have their own allotment dates. Units allotted before 01-02-2018 can qualify; units allotted later cannot. Check how the cost of bonus units is treated with a tax professional.
Finding the 31-01-2018 NAV
AMFI publishes historical NAVs for every scheme on its website. Search by scheme and pick 31-01-2018. Make sure the plan and option match the units held (regular vs direct, growth vs IDCW), because each has a different NAV.
Use RTA capital gains statements
Capital gains statements from CAMS and KFintech often show the grandfathered cost already applied, along with the 31-01-2018 value. Cross-check these against your own records rather than rebuilding everything by hand. Back-office platforms such as IntelliWealthPro can also apply the grandfathering formula when preparing realised gain reports.
Key points to remember
- Grandfathering protects gains up to 31-01-2018, not losses.
- It never makes the cost lower than what was actually paid.
- It applies per lot, so dates matter for every instalment.
Rules are as of FY 2025-26 and can change. Verify with a tax professional before filing.
Information only. Not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.
Frequently asked questions
Which investments get the grandfathering benefit?
Listed equity shares and units of equity-oriented mutual funds acquired before 01-02-2018 and sold as long-term capital assets under Section 112A.
What is the fair market value for mutual fund units?
For units not listed on an exchange, which covers most mutual fund units, it is the NAV on 31-01-2018. For listed shares it is the highest price quoted on a recognised stock exchange on that date.
Can grandfathering create a capital loss?
Not by itself. If the sale value is below the 31-01-2018 value, the cost is capped at the sale value. A loss arises only if the sale value is below the actual purchase cost.
Does grandfathering apply to every SIP instalment?
Only to instalments with purchase dates before 01-02-2018. Instalments after that date use their actual cost.
Mutual fund investments are subject to market risks; read all scheme-related documents carefully. This article is general information for mutual fund distributors and their clients. It is not investment, tax or legal advice and not a recommendation to buy, sell or hold any scheme. Past performance does not indicate future returns.