Concept of Grandfather Clause By FCS Deepak Pratap Singh

Dear Friends,

We know that “ Grandfather Clause” in any law or rule or regulation is a provision ,which allow people or entities to follow old rules ,laws or provisions ,which they are accustoms to follows in previous years instead of new rules ,laws or provisions. This will be applicable for a short span of time. This “Grandfather Clause” may be temporary, permanent or for short period of time. This clause exempt people or entities engaged in specified activities before implementation of new law or provisions. This “Grandfather Clause”, will be applicable to those people or entities which exit before implementation of new laws or provisions. Any people or entity establishing after implementation of new la or provisions will not bee allowed to enjoy this clause.


WIKIPEDIA -A grandfather clause (or grandfather policy or grandfathering) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in. Frequently, the exemption is limited; it may extend for a set time, or it may be lost under certain circumstances. For example, a grandfathered power plant might be exempt from new, more restrictive pollution laws, but the exception may be revoked and the new rules would apply if the plant were expanded. Often, such a provision is used as a compromise or out of practicality, to allow new rules to be enacted without upsetting a well-established logistical or political situation. This extends the idea of a rule not being retroactively applied.

INVESTOPEDIA -A grandfather clause is an exemption that allows persons or entities to continue with activities or operations that were approved before the implementation of new rules, regulations, or laws. Such allowances can be permanent, temporary, or instituted with limits.


The Budget, 2018 introduced Section 112A by removing provisions of Section 10(38) of the Income Tax Act,1961. Section 112A introduced to tax Long Term Capital Gain Tax on;


  2. Equity Oriented Mutual Funds;

  3. Business Trusts.

The LTCG will be now taxable @10% in the hand of recipient on or above gain of Rs.1,00,000/- and there will no indexation benefit is available.

SECTION 10(38) provides that:

Section 10(38) of The Income Tax Act, 1961 is on Income from transfer of certain equity, units etc.

Any income arising on or after 1.10.2004 from the transfer of long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust where –

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that chapter.

shall be exempt from income tax.

Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and the income tax payable under Section 115 JB.

Provided also that nothing contained in sub-clause (b) shall apply to a transaction undertaken on a recognised stock exchange located in any International Financial Services Center and where the consideration for such transaction is paid or payable in foreign currency.

Explanation: For the purpose of this clause,

(a) “equity oriented fund” means a fund –

(i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty-five percent of the total proceeds of such fund; and

(ii) which has been set up under a scheme of Mutual Fund specified under clause 10(23 D).

Provided that the percentage of equity share holding of the fund shall be computed with reference to the annual average of the monthly average of the opening and closing figures.

(b) “International Financial Services Center” shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

(c) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation 1 to subsection (5) of s

NEW INTRODUCED SECTION 112A provides that;

Long Term Capital Gain Tax will be taxable @10% on or above Rs. 1.00 lakhs received during the year on transfer of Equity Shares, Units of Equity Oriented Mutual Funds and units of Business trusts ,subject to below mentioned conditions;

1.   On equity shares of a company the Security Transaction Tax(STT) has been paid on acquisition and transfer;

2.   In case of units of Equity Oriented Mutual Funds or Business Trusts ,STT has been paid at the time of sale of units;

3.   The securities transferred should be long term capital asset;

4.   Deduction under Chapter VI-A cannot be availed;

5.   Rebate  under Section 87A cannot be availed.

LET’S understand provisions;

Example 1: Suppose Mr. A has income from transfer of Equity Shares  or Units of Equity Oriented Mutual Fund or Units of business Trust to the tune of Rs. 2,50,000/-. The tax will be @10% on Rs.(2,50,000-1,00,000) i.e. Rs. 15,000/- under provisions of Section 112A.

Example 2; in case of individual or HUF the taxability will be considered differently , if total income as reduced by such Long Term Capital Gains is below basic exemption limit ,then the LTCG stand. Reduced by such shortfall amount. Let’s consider above example Mr. A’s total income from other sources was of Rs. 2,00,000/- and LTCG Rs. 2,50,000/-. We know that basic exemption limit is Rs. 2,50,000/- then in this case tax on LTCG will be taxable as follows @10% on Rs. 1,00,000/-(2,50,000-2,00,000-50,000).


If tax is payable under Section 112A ,cos of acquisition of equity shares/units shall be calculated according to the provisions given in Section 55(2)(ac). This provision is applicable only in case of shares /units acquired by the assessee before February 1, 2018.


Find out actual cost of acquisition of equity shares/units

Step 2

Find out Fair Market Value of equity shares/units on January 31,2018 ( but it cannot be more than sale consideration of equity shares/units being sold).

The Cost of Acquisition will be the amount lower of the above two.


Shares/Units is listed on any recognised stock exchange , the highest value/price of shares/units quoted on such exchange on January 31,2018 is taken as Fair Market Value.

In case there is trading in such shares /units on such stock exchange as on January 31,2018 ,the highest price of such shares/units on such exchange on a date immediately preceding January 31,2018 when such share/unit was traded on such exchange ,shall be the Fair Market Value.

Units not listed on any Stock Exchange , the Net Asset Value (NAV)of such units as on January 31,2018 is taken as Fair Market Value.

If shares are not listed on any Stock Exchange as on January 31,2018 but listed on the date of transfer of shares- then Fair Market Value of these shares will be calculated as follows;

                                  Cost Inflation Index (CII) of FY 2017-18

Cost of Acquisition=———————————————————-

                                  CII for the year in which shares were first held by        the assessee( or previous owner in a few cases) or 2001-02 whichever is later.


Suppose Mr. A has given below mentioned details;

  • Cost of acquisition of 1000 Equity Shares of X Ltd., on March 2014( on which STT has been paid) Rs 20/- per share;

  • FMV on 31/01/2018 ( highest quote on BSC as on 31/01/2018) is Rs. 150/- per share;

  • Date of Transfer of 1000 Equity Shares 20/04/2018;

  • The selling price per shares Rs. 490/-.

  • Income from other sources Rs. 5,00,000/-

Calculation of Tax Liability of Mr. A;

STEP 1: Since conditions of Section 112A are satisfied and hence the tax liability will be calculated under Section 112 A of the Act, 1961.

  • Cost of acquisition ;

i) Actual Cost of Acquisition (1000*110).            1,10,000

ii) Fair Market Value ( on 31/01/2018).                1,50,000

The Cost of Acquisition will be whichever is higher  of above two i.e. Rs. 1,50,000/-

STEP 2: Computation of Income

Long Term Capital Gain = Rs. (1000*490-1,50,000)= Rs. 3,40,000/-.

Other Income                                                            = Rs. 5,00,000/-


                                             Net Income;                   Rs. 8,40,000/-


STEP 3: Tax Calculation:

i) Income tax on LTCG

( 10% of Capital gain excess of Rs. 1,00,000/-).       Rs. 24,000/-

ii) Income Tax on other incomes                              Rs. 12,500/-

( without deduction & rebates)                                 ==========

Income Tax                                                                 Rs. 36,500/-

Add: Health and Education Cess @4%.                  Rs.    1,460/-


Total Tax Liability                                                       Rs. 37,960/-                   


The example give above is an example of “Grandfather Clause”, inserted under Income Tax Act,1961 by introducing provisions of section 112A.

The concept of grandfathering in the case of LTCG on sale of equity investments works as follows:

A method of determining the Cost of Acquisition (COA) of such investments have been specifically laid down as per the COA of such investments shall be deemed to be the higher of:

  • The actual COA of such investments; and

  • The lower of-

  •       Fair Market Value (‘FMV’) of such investments; and

  •      the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price

LET’S ANALYSE ; Suppose Mr. B has acquired 500 Equity Shares ( on which STT has been paid ) at Rs. 100/- per share on 15/06/2016 of XYZ Ltd. These shares are trading on BSE and he has sold his shares on 31/03/2020 at the rate of 250/- per equity shares. The highest value of shares on 31/03/2020 at BSE was Rs.180/- per share( this should be taken as FMV)).

Calculation of Capital Gain Tax;

Step 1:

i)Cost of Acquisition of Shares (500*100)                           Rs. 50,000/-

Step 2:

i)Fair market Value of Shares (on 31/03/2020).                 Rs. 90,000/-

ii) Sale consideration ( 500*250)                                            Rs. 1,25,000/-

Lower of the above  two is  Rs. 90,000/-

COST OF ACQUISITION WILL BE ; higher  of Step 1 and Step 2 i.e. Rs. 90,000/-

Step 3

Capital Gain Tax.  @10%( 1,25,000-90,000)=                   Rs. 3,500/-


  1. Purchase /sale before 31/01/2028 of Equity Shares/Unites of Equity Oriented Mutual Funds /Units of Business Trusts was exempted under provisions of Section 10(38) of the Act, 1961;
  1. Purchase before 31/01/2018 and sale after 31/01/2018 but before 01/04/2018 was exempted under provisions of Section 10(38) of the Act,1961;
  1. Purchase before 31/01/2018 but sold after 01/04/2018, in this case the Capital gain accrued before 31/01/2018 will be exempted and sale after 01/04/2018 the LTCG will be calculated by applying above referred provisions.
  1. Purchase after 31/01/2018 but sold on or afte 01/04/2018 then LTCG will be calculated on the basis of above given provisions. 

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