Grandfathering on WebNotes

Grandfathering of LTCG on equity MFs (31 January 2018)

Tue, 12 May 2026 00:00:00 +0000

Grandfathering of LTCG on equity mutual funds refers to the statutory mechanism under Section 55(2)(ac) of the Income Tax Act 1961 that protects gains accrued on equity-oriented mutual fund units before 1 February 2018 from being taxed under Section 112A. The provision was inserted by the Finance Act 2018 simultaneously with the reintroduction of LTCG tax on equity after a 14-year hiatus. It operates by deeming the cost of acquisition of pre-2018 units to be the higher of the actual purchase price and the fair market value (FMV) of the units on 31 January 2018, subject to an upper cap of the actual sale price. The effect is that all appreciation up to 31 January 2018 is excluded from the taxable LTCG base.

How to compute LTCG with grandfathering on Zerodha

Tue, 12 May 2026 00:00:00 +0000

When the Finance Act 2018 reintroduced long-term capital gains tax on listed equity and equity-oriented mutual funds under section 112A, it included a grandfathering rule to protect gains accrued before the provision came into force. Under this rule, the cost of acquisition for equity held on 31 January 2018 is deemed to be the Fair Market Value (FMV) on that date if the actual cost is lower, but only to the extent of the sale consideration. This ensures that gains accrued up to 31 January 2018 are not taxed under section 112A.

LTCG on equity mutual funds (Section 112A)

Tue, 12 May 2026 00:00:00 +0000

Long-term capital gains (LTCG) on equity-oriented mutual funds are taxed under Section 112A of the Income Tax Act 1961 at a flat rate of 12.5% on gains exceeding Rs 1,25,000 per financial year, as revised by the Finance Act 2024 effective 23 July 2024. Section 112A was introduced by the Finance Act 2018 to reimpose LTCG tax on listed equity after a 14-year exemption and is the primary charging section for long-term redemptions of equity mutual fund units, ELSS, balanced hybrid funds, and arbitrage funds that qualify as equity-oriented. Indexation is not available under Section 112A. The grandfathering provision in Section 55(2)(ac) ensures that gains accrued before 1 February 2018 are excluded from the taxable base.

Taxation of equity mutual funds in India

Tue, 12 May 2026 00:00:00 +0000

Taxation of equity mutual funds in India is governed principally by Sections 111A and 112A of the Income Tax Act 1961, with rates last revised by the Finance Act 2024 with effect from 23 July 2024. An equity-oriented mutual fund, as defined under Section 112A(10), is a fund that invests at least 65% of its total proceeds in equity shares of domestic companies. Capital gains on such funds are split into short-term capital gains (STCG) if the units are held for twelve months or less, and long-term capital gains (LTCG) if held for more than twelve months. As of 23 July 2024, STCG is taxed at 20% under Section 111A and LTCG exceeding Rs 1,25,000 per financial year is taxed at 12.5% under Section 112A, without the benefit of indexation. Dividend income distributed by equity funds, renamed Income Distribution cum Capital Withdrawal (IDCW) by SEBI in 2021, is taxed as ordinary income at slab rates.

Grandfathering rule for LTCG

Mon, 11 May 2026 00:00:00 +0000

The grandfathering rule for long-term capital gains (LTCG) is a transitional provision in Section 112A of the Income Tax Act 1961 that protects equity investors from being taxed on gains that accrued before 1 February 2018. Under the rule, the cost of acquisition for computing LTCG on listed equity shares and equity-oriented mutual funds acquired before 31 January 2018 is deemed to be the higher of the actual purchase price and the fair market value (FMV) of the asset as on 31 January 2018. This has the effect of “grandfathering” all pre-February 2018 appreciation out of the taxable base.