All you wanted to know about grandfathering and LTCG

Shashikant Singh
/ Categories: Trending, Mutual Fund, DSIJ News

Many of us might have heard the term 'grandfathering' for the very first time in Arun Jaitley's budget speech. Let's understand what grandfathering means and how is it applicable in calculating LTCG tax on gains from equity or mutual fund investment.

Grandfathering is an exemption provided to investors on all the gains that they have made before the new provision were announced. In other words, grandfathering is about taxing profits without any retrospective impact. This is done to make tax implementation and calculation easier. In case of the LTCG announcement made during budget 2018, all the gains made on or before January 31, 2018 will be exempted or will be grandfathered.

 

Introduction of the LTCG give rise to four different conditions which are explained below:

 

Condition 1: Suppose you bought MFs unit on January 1, 2017 at Rs. 1,000, its market value is Rs. 2,000 on January 31, 2018, and he finally sold it on April 1, 2018 at Rs. 3,500. As the actual cost of purchase is less than the price prevailing on January 31, 2018, you will have to take the market price of Rs. 2,000 as the cost of acquisition and the LTCG will be Rs. 1,500 (Rs. 3,500 - Rs. 2,000).

 

Condition 2: Suppose you bought MFs unit on January 01, 2017 at Rs. 1,000, its fair market value is Rs. 750 on January 31, 2018, and you sold it on April 1, 2018 at Rs. 3,000. In this scenario, cost of acquisition will be Rs, 1,000, which is higher of the cost of purchase or fair market value prevailing as on January 31, 2018. Therefore, the LTCG will be Rs. 2,000 (Rs. 3,000 - Rs. 1,000).

 

Condition 3: In this case, if you acquired an MF unit on January 1, 2017 at Rs. 1,000, its fair market value is Rs. 1,350 on January 31, 2018, and you sold the entire units on April 1, 2018 at Rs. 1,250. In this case, the fair market value as on January 31, 2018 is more than the actual cost of acquisition, and therefore, Rs. 1,350 will be taken as the actual cost of acquisition and the long-term capital gain will be Rs. 0 (Rs. 1,250 – Rs. 1,350).

 

Condition 4: Suppose you bought an MF unit on January 1, 2017 at Rs. 1,000, its fair market value is Rs. 650 on January 31, 2018, and it is sold on April 1, 2018 at Rs. 700. In this case, the actual cost of acquisition is less than the fair market value as on January 31, 2018. Even if the price that you sold is lower than both your cost of acquisition as well as the fair market value as on January 31, 2018, you will entail a long-term capital loss of Rs. 300 (Rs. 700 - Rs. 1,000). Such a loss can be set-off against any other long-term capital gains and you can carry it forward to subsequent eight years for set-off against long-term capital gains.

 

Different Conditions

Equity Mutual Fund units purchased on Jan 1, 2017 (Rs)

Value of investment as on January 31, 2018 (Rs)

Sale value on April 5, 2018 (Rs)

Long-term capital gain

Condition 1

1000

2000

3500

Rs 1500 (‘3500’ – ‘2000’, as ‘2000’ is higher than ‘1000’)

Condition 2

1000

750

3000

Rs 2000(‘3000’ – ‘1000’, as ‘1000’ is higher than ‘750’)

Condition 3

1000

1350

1250

0 (as ‘1250’ is lower than ‘1350’ and higher than ‘1000’)

Condition 4

1000

650

700

LTCG loss of Rs 300. (‘700’ – ‘1000’)

 

 

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