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Pay lower capital gains taxes for equity: understand how grandfathering works

Posted on 27 Jul 2022 • Updated on: 26 Jul 2024
Author: Sayan Sircar

Tags: Tax ; Calculator

12 mins read
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This article explains the concept of equity LTCG grandfathering in detail with multiple case studies and examples.

Pay lower capital gains taxes for equity: understand how grandfathering works

This article is a part of our detailed article series on the concept of mutual fund taxation in India. Ensure you have read the other parts here:

What are the tax implications of selling inherited shares and equity mutual funds?

This article shows how to calculate the tax on selling inherited shares and equity mutual funds using the grandfathering concept.

How to calculate and save tax on mutual funds?

This article is expected to give investors in India a complete guide on the topic of calculation of taxes on mutual funds.

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What should debt, international and gold mutual fund investors do now that these funds are taxable at slab rate?

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Pay lower capital gains taxes for debt mutual funds: understand how indexation works

This article shows you how the concept of indexation lowers the capital gains tax you pay when you sell debt mutual funds.

Which mutual fund has lower tax - international funds at 20 percent vs domestic at 10 percent?

This article settles the question of which type of capital gain calculation is better - debt-type funds taxed at 20% with indexation vs equity-type at 10%.

How to calculate taxes from capital gains and combine them with your other income

This article talks about understanding capital gains tax calculations and computing offsets vs other income.

How is tax calculated on selling shares/MFs and how do to do tax harvesting?

This post discusses the concept of tax calculations and tax harvesting in a simple manner.

📚 Topics covered:

What is so special about equity capital gains calculation?
Scope of assets under equity taxation
Calculating short-term capital gains tax on equity-related assets
Calculating long-term capital gains tax on equity-related assets
Worked out examples
Calculator for LTCG grandfathering
What has been the amendment regarding equity capital gains due to Budget 2024?

What is so special about equity capital gains calculation?

Long-term capital gains (LTCG) for equity-type assets (like shares and mutual funds) were made taxable, under Section 112A, in the Budget presentation of 2018. Before that, since 2004, LTCG for equity was zero to attract Foreign Institutional Investors (FII).

To assuage investors’ concerns that a lot of capital gains tax will have to be paid for shares purchased at old low prices, the Finance Ministry exempted any capital gains accumulated before 31-Jan-2018. This is the concept of grandfathering of long-term equity capital gains.

This article should be read in conjunction with this one: How is tax calculated on selling shares/MFs?

Scope of assets under equity taxation

The formula applies to the sale of the following assets called equity-related assets:

equity shares on which STT is paid
shares of REITs and InvITs
equity mutual funds with at least 65% Indian shares
fund of fund mutual funds with total exposure exceeding 65% Indian shares

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Short-term capital gains arise if the asset is sold only after buying it less than a year back.

The formula is simple:

CG = MV - BV

where

CG = Equity-related capital gains on which tax will be calculated
MV = Sale value of the position reduced by transfer costs like stamp duty and brokerage
BV = Purchase value of the position

Tax is calculated as:

Tax = 20% * CG

where CG = total equity-related capital gains as per the PAN of the investor across all selling done between 1st Apr to 31st Mar

Long-term capital gains arise if the asset is sold only after buying it more than a year back.

Calculation formula

If you purchased units on or before 31-Jan-2018 (Grandfathering applies),

CG = MV - max ( BV , min ( FMV , MV ) )

Else, i.e. you purchased the units after 31-Jan-2018 (Grandfathering does not apply)

CG = MV - BV

where

CG = Equity-related capital gains on which tax will be calculated
MV = Sale value of the position reduced by transfer costs like stamp duty and brokerage. This number is called Cost of Acquisition in income tax rules
BV = Purchase value of the position
FMV = Value of the position on 31-Jan-2018 (see below)

FMV Calculation

Fair Market Value (FMV) is calculated from the following data sources using prices on 31-Jan-2018. If you purchased your units after 31-Jan-2018, FMV calculation is not applicable. You can set CG = MV - BV. To calculate FMV, you will need:

mutual fund NAVs from AMFI.
NSE Bhavcopy that has the maximum intraday price for shares sold on the National Stock Exchange
BSE Bhavcopy that has the maximum intraday price for shares sold on the Bombay Stock Exchange

FMV = MF Units or Shares sold * (NAV on 31Jan2018 or the highest intraday price of the share on 31Jan2018)

You can download the files from here:

CG tax calculation

Tax = 15% * max ( 0, CG - ₹125,000 )

where CG = total equity-related capital gains as per the PAN of the investor across all selling done between 1st Apr to 31st Mar. Of course, you can off set this gain vs. any capital loss as explained here: How to calculate taxes from capital gains and combine them with your other income

Note: Before Budget 2024, the rates were 15% for STCG and 10% (with ₹1 lakh exemption) for LTCG.

Also read
What should an US NRI do to become compliant with PFIC and FBAR rules on their Indian investments?

Worked out examples

Short-term capital gains calculations

This is a straightforward calculation:

Purchased 100 units at ₹40 on 02-Jan-2019 for a total of ₹4,000. Sold them for ₹6,000 on 01-Dec-2019 (within one year)
Capital gains is ₹6,000 - ₹5,000, i.e. ₹1,000
Tax will be 15% of ₹1,000, i.e. ₹150

Long-term capital gains calculations without grandfathering

This is another straightforward calculation:

Purchased 100 units at ₹40 on 02-Jan-2019 for a total of ₹4,000. Sold them for ₹6,000 on 01-Dec-2022 (beyond one year)
Capital gains is ₹6,000 - ₹5,000, i.e. ₹1,000
Tax will be 10% on any LTCG exceeding ₹100,000

Long-term capital gains calculations with grandfathering

Case 1: Purchase price < 31Jan2018 price < Sale price

Purchased 100 units at ₹40 on 02-Jan-2017 for a total of ₹4,000. Sold them for ₹6,000 on 01-Jan-2020.

Price on 31-Jan-2018 is 50
MV calculation: max of the purchase value of ₹4,000 and lower of FMV ₹5,000 of and sale value of ₹6,000
i.e MV is ₹5,000
Capital gains is ₹6,000 - ₹5,000, i.e. ₹1,000

Case 2: Purchase price < Sale price < 31Jan2018 price

Purchased 100 units at ₹40 on 02-Jan-2017 for a total of ₹4,000. Sold them for ₹4,500 on 01-Jan-2020.

Price on 31-Jan-2018 is 50
MV calculation: max of the purchase value of ₹4,000 and lower of FMV ₹5,000 of and sale value of ₹4,500
i.e MV is ₹4,500
Capital gains are ₹4,500 - ₹4,500, i.e. ₹0

Case 3: Purchase price = Sale price < 31Jan2018 price

Purchased 100 units at ₹40 on 02-Jan-2017 for a total of ₹4,000. Sold them for ₹4,000 on 01-Jan-2020.

Price on 31-Jan-2018 is 50
MV calculation: max of the purchase value of ₹4,000 and lower of FMV ₹5,000 of and sale value of ₹4,000
i.e MV is ₹4,000
Capital gains are ₹4,000 - ₹4,000, i.e. ₹0

Case 4: Sale price < Purchase price < 31Jan2018 price

Purchased 100 units at ₹40 on 02-Jan-2017 for a total of ₹4,000. Sold them for ₹3,500 on 01-Jan-2020.

Price on 31-Jan-2018 is 50
MV calculation: max of the purchase value of ₹4,000 and lower of FMV ₹5,000 of and sale value of ₹3,500
i.e MV is ₹4,000
Capital loss is ₹3,500 - ₹4,000, i.e. ₹-500

Case 5: Sale price < 31Jan2018 price < Purchase price

Purchased 100 units at ₹60 on 02-Jan-2017 for a total of ₹6,000. Sold them for ₹3,500 on 01-Jan-2020.

Price on 31-Jan-2018 is 50
MV calculation: max of the purchase value of ₹6,000 and lower of FMV ₹5,000 of and sale value of ₹3,500
i.e MV is ₹6,000
Capital loss is ₹3,500 - ₹6,000, i.e. ₹-2,500

Case 6: 31Jan2018 price < Purchase price < Sale price

Purchased 100 units at ₹60 on 02-Jan-2017 for a total of ₹6,000. Sold them for ₹7,000 on 01-Jan-2020

Price on 31-Jan-2018 is 50
MV calculation: max of the purchase value of ₹6,000 and lower of FMV ₹5,000 of and sale value of ₹7,000
i.e MV is ₹6,000
Capital gains is ₹7,000 - ₹6,000, i.e. ₹1,000

Case 7: 31Jan2018 price < Sale price < Purchase price

Purchased 100 units at ₹70 on 02-Jan-2017 for a total of ₹7,000. Sold them for ₹6,000 on 01-Jan-2020.

Price on 31-Jan-2018 is 50
MV calculation: max of the purchase value of ₹7,000 and lower of FMV ₹5,000 of and sale value of ₹6,000
i.e MV is ₹7,000
Capital loss is ₹6,000 - ₹7,000, i.e. ₹-1,000

Calculator for LTCG grandfathering

Our goal-based investing calculator contains a dedicated sheet to calculate equity grandfathering, including the NAVs from AMFI and the stock prices from NSE/BSE for 31st January 2018.

Equity LTCG Grandfathering Calculation

Click the image below to get the calculator

Please refer to the “eq-ltcg” tab in the sheet.

What has been the amendment regarding equity capital gains due to Budget 2024?

Budget 2024, released on 23rd July 2024, made some changes to equity taxation. For LTCG (sale after 1-year of ownership)

grandfathering for shares / equity-oriented mutual funds purchased before 31st Jan 2018 remains as-is i.e. tax-free as per this article’s text
for sales on or after 23rd July 2024, the taxation rate is now 12.5% with the exemption limit increased to ₹1.25 lakhs
for sales between 1st April 2024 to 22nd July 2024, any capital gains from 1st February 2018 to sale date will be taxed at 10% with ₹1 lakh exemption as per this article

For STCG (sale before one year of ownership), the rules are:

for sales between 1st April 2024 to 22nd July 2024, any capital gains will be taxed at 15%
for sales on or after 23rd July 2024, any capital gains will be taxed at 20%

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