Archive / Investment Adviser (Level 2) / Taxation of Equity Products
nism-series-xb-grandfathering-clause-31-january-2018[ INVESTMENT ADVISER (LEVEL 2) ]
The 'grandfathering' provision under Section 198 of the Income-tax Act, 2025 (the erstwhile Section 112A of the Income-tax Act, 1961), applicable to equity shares/units acquired on or before 31 January 2018, allows the cost of acquisition to be taken as the higher of the actual cost or which alternative value?
[ A ]The fair market value (highest traded price) of the asset as on 31 January 2018, subject to it not exceeding the actual full value of consideration received on sale[ CORRECT ]
[ B ]The fair market value of the asset as on 1 April 2001
[ C ]The original issue price at the time of the company's IPO
[ D ]Zero — the grandfathering clause affects only the exemption amount, not the cost of acquisition
Takeaway
Option A is correct: the fair market value as on 31 January 2018, capped at the actual sale value.
Derivation
When Section 112A (now Section 198 of the Income-tax Act, 2025) reintroduced LTCG tax on listed equity shares from FY 2018-19, a grandfathering clause was built in to protect gains accrued before the law changed. For shares/units acquired on or before 31 January 2018, the cost of acquisition for capital gains purposes is deemed to be the higher of (a) the actual cost of acquisition, or (b) the fair market value (generally the highest quoted price) of the asset as on 31 January 2018 — with this deemed cost capped so it never exceeds the actual sale consideration received. This effectively exempts gains that had already accrued up to that date from retroactive taxation.
Why the others fail
B — The fair market value of the asset as on 1 April 2001
1 April 2001 is the base date used for indexation of certain other assets under separate capital gains provisions, not the grandfathering date fixed for Section 198 equity gains.
C — The original issue price at the time of the company's IPO
The grandfathering benefit is anchored to a fixed market valuation date (31 January 2018), not the historical IPO issue price, which could differ substantially from actual acquisition cost.
D — Zero — the grandfathering clause affects only the exemption amount, not the cost of acquisition
The grandfathering clause specifically operates by adjusting the deemed cost of acquisition upward, not by modifying the exemption threshold.