WHAT IS GRANDFATERING

In budget of financial year 2018-19, there was a proposal to grandfather investment made on or before 31.01.18.

Since the law was made in respect of taxation of long term capital gain from equity shares and equity oriented mutual funds, the investors who invested their money before making a new law, were given the right to avail concession. This is called grandfathering.

The persons who enjoy the right to avail this concession are called grandfathered.

HOW THE CONCEPT OF GRANDFATHERING WORKS

For calculation of long term capital gain from equity shares of equity oriented mutual funds we need :-

  • Purchase cost of investment.
  • Sales price of investment.
  • Fair Market Value of investment as on 31.01.18
  • Cost of acquisition of investment.

The concept of grandfathering in the case of Long Term Capital Gain from equity shares and equity oriented mutual funds works as under:-

  1. Cost of acquisition is determined as higher of
    1. The actual cost of investment
  2. Lower of
    1. Fair market value of of such investment as on 31.01.18
    2. Sales price of investment.

It means to calculate long term capital gain or loss on equity shares or equity oriented mutual funds, purchased on or before 31.01.18, we require Cost of acquisition of the investment as on 31.01.18 and cost of acquisition can be determined by using the above formula.

The method of computation of long term capital gain/loss under new rules can be understood by following examples:-

Illustration – 1:-

Mr. X purchased equity oriented mutual funds on 15.12.16 for Rs.2,00,000/=. The fair market value of these funds as on 31.01.19 was Rs.130000/=. He sold the funds  on 25.06.18 for Rs.1,00,000/= . Calculate the long term capital gain or loss.

Ans.

First of all we will calculate Cost of Acquisition  and this will be calculated as under :-

  • 1. Purchase cost of funds Rs.2,00,000/=
  • 2. Fair market value of funds as on 31.01.18 is Rs.1,30,000/=
  • 3. Sales price of funds is Rs.1,00,000/=

In this case, the cost of acquisition will be Rs.2,00,000/=.

Long term capital loss will be Sales Price minus Cost of acquisition i.e. Rs.1,00,000/= – 2,00,000/=  i.e.  Rs.1,00,000/=.

Illustration- 2:-

Mr. X purchased equity shares on 01.05.15 for Rs.1,00,000/= and sold these shares on 15.12.18 for Rs.1,50,000/=. The fair market value of these shares as on 31.01.18 was Rs.1,30,000/=.

Calculate the long term capital gain or loss.

Ans.

First of all we will calculate Cost of Acquisition  and this will be calculated as under :-

  • 1. Purchase cost of shares Rs.1,00,000/=
  • 2. Fair market value of shares as on 31.01.18 is Rs.1,30,000/=
  • 3. Sales price of funds is Rs.1,50,000/=

In this case, the cost of acquisition will be Rs.1,30,000/=.

Long term capital gain will be Sales Price minus Cost of acquisition i.e. Rs.1,50,000/= – 1,30,000/=  i.e.  Rs.20,000/=.

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