Grandfathering Under Section 112A: FMV as on 31 January 2018 and Schedule 112A (AY 2026-27)

If you are still holding shares or equity mutual fund units you bought before February 2018, the gain you show in your return is almost never the gain your broker statement shows. A special rule called grandfathering lets you ignore all the appreciation that happened up to 31 January 2018, and it is the single most misfiled item in Schedule 112A.

Most people either forget it entirely and pay tax on a decade of gains they were never meant to pay tax on, or they apply it in the wrong direction and understate their income. Here is exactly how it works for AY 2026-27.

Why Grandfathering Exists

Long-term capital gains on listed equity were completely exempt under Section 10(38) until 31 March 2018. The Finance Act 2018 removed that exemption and introduced Section 112A, which taxes LTCG on listed shares, equity-oriented mutual funds and units of business trusts where STT has been paid.

Taxing an investor on twenty years of accumulated gains overnight would have been retrospective in effect, so Parliament added a protective rule in Section 55(2)(ac). Everything your investment gained up to 31 January 2018 stays out of the tax net permanently. That protection is what people call the grandfathering clause, and it never expires - it applies to a share bought in 1998 or in January 2018 alike, whether you sell it this year or in 2035.

The Rule in One Line

For any Section 112A asset acquired before 1 February 2018, your cost of acquisition is:

Higher of (a) the actual cost you paid, and (b) the lower of (i) the fair market value as on 31 January 2018 and (ii) the sale consideration you actually received.

Read it twice - it is a nested comparison, not a simple substitution. The inner "lower of" step is what stops grandfathering from manufacturing an artificial loss when a stock has fallen since 2018.

Three consequences follow directly from that structure:

• If the stock rose after 31 Jan 2018, your cost becomes the 31 Jan 2018 FMV, and only post-2018 appreciation is taxed.
• If you sell between your actual cost and the 31 Jan 2018 FMV, your cost becomes the sale price - the result is exactly nil gain, nil loss.
• If you sell below your actual cost, your cost stays the actual cost - you get to claim the full genuine loss.

What Counts as "FMV as on 31 January 2018"

This is where most manual filers go wrong. The FMV is a defined statutory number, not the closing price and not your app's displayed value.

Two practical notes. The highest price is the intraday high, not the close - for many large caps the difference is 2 to 4 percent, which is real money on a large holding. And if you have bonus or split events after January 2018, the FMV must be adjusted to the post-corporate-action unit, otherwise your per-unit FMV will be wildly overstated.

Registrars and AMCs publish 31 Jan 2018 NAVs, and the exchanges published the official highest-price list for that date. Most broker capital gains statements now apply grandfathering automatically, but AIS does not - AIS reports sale consideration only, so never take a gain figure from AIS at face value. 49Tax reads the scrip-wise data from your broker's capital gains statement and applies the Section 55(2)(ac) comparison per lot, which is where the arithmetic usually breaks down when it is done by hand.

Four Worked Examples

Assume in each case you bought 500 shares and sold them in FY 2025-26 after holding for more than 12 months.

Case 1 - the normal case. You bought at Rs 200 in 2015 (cost Rs 1,00,000). The 31 Jan 2018 high was Rs 450 (Rs 2,25,000) and you sold at Rs 900 (Rs 4,50,000). Lower of FMV and sale price is Rs 2,25,000; higher of that and actual cost is Rs 2,25,000. Taxable LTCG is Rs 2,25,000 instead of Rs 3,50,000 - grandfathering removed Rs 1,25,000 from your income.

Case 2 - sale price falls between cost and FMV. Same purchase at Rs 200, same FMV of Rs 450, but you sold at Rs 300 (Rs 1,50,000). Lower of FMV (Rs 2,25,000) and sale price (Rs 1,50,000) is Rs 1,50,000; higher of that and Rs 1,00,000 is Rs 1,50,000. Gain is exactly nil. You made a real profit of Rs 50,000 and pay nothing - but you also cannot claim a loss.

Case 3 - a genuine loss. Bought at Rs 200, FMV Rs 450, sold at Rs 150 (Rs 75,000). Lower of FMV and sale price is Rs 75,000; higher of that and actual cost Rs 1,00,000 is Rs 1,00,000. You book a real long-term loss of Rs 25,000, which you can carry forward for eight years.

Case 4 - bought after the cut-off. Bought in March 2018. Grandfathering does not apply at all; the cost is simply what you paid. The date that matters is the acquisition date, so a lot bought on 25 January 2018 is grandfathered and one bought on 5 February 2018 is not.

How the Tax Is Then Calculated for AY 2026-27

Once the grandfathered cost is settled, Section 112A applies in the ordinary way for FY 2025-26:

The Rs 1.25 lakh exemption is applied to your aggregate 112A gains for the year, after grandfathering - not to each scrip. It is also not available against STCG, and it is not a deduction you claim anywhere; the ITR utility computes it once Schedule 112A is complete. Our guide to capital gains tax on stocks and mutual funds covers the wider reporting picture.

Filling Schedule 112A Without Triggering a Mismatch

Schedule 112A is scrip-wise and lot-wise, and the ITR-2 utility computes the gain itself from the columns you enter. For each row you provide the ISIN, the name of the scrip, the number of units, the sale price per unit, the full value of consideration, the cost of acquisition without grandfathering, the FMV as on 31 January 2018, and any transfer expenditure.

The single most common error is entering an already-grandfathered cost in the "cost of acquisition without grandfathering" column while also filling the FMV column. The utility then applies the benefit a second time and understates your income, which is exactly the kind of arithmetic difference that surfaces as a Section 143(1) adjustment months later. Put the raw purchase cost in the cost column and the 31 Jan 2018 FMV in the FMV column, and let the utility do the comparison.

Three more things worth checking before you submit:

1. Leave the FMV column blank or zero for post-1 Feb 2018 purchases. Filling it for a 2022 purchase silently reduces your taxable gain.
2. Report gains even if they are below Rs 1.25 lakh. The exemption is not a filing threshold, and an unreported sale still shows up in your AIS.
3. Split each purchase lot into its own row where the acquisition dates straddle 1 February 2018 - a single averaged row will be wrong for both halves.

If your gain is being suppressed to nil by Case 2 above, remember that you cannot use that scrip for tax-loss harvesting - there is no loss to harvest, only a gain the law has already neutralised.

Where Grandfathering Does Not Apply

The relief is narrower than most investors assume. It is available only for assets covered by Section 112A - listed equity shares, equity-oriented mutual funds and units of business trusts, all with STT paid on transfer.

It does not apply to debt mutual funds, unlisted shares, gold or sovereign gold bonds, property, foreign stocks such as US-listed shares, or ESOPs of unlisted companies. For those assets the ordinary cost rules apply, and where indexation is still available it works instead of, not alongside, grandfathering. There is no version of the rule that gives you both.

The Takeaway

Before you file, pull your broker's capital gains statement and check one thing: for every scrip you bought before February 2018, is the 31 January 2018 FMV populated, and is the cost column showing what you actually paid rather than an adjusted figure? Those two columns decide whether you overpay tax on a decade of pre-2018 appreciation or understate your income and invite a correction notice. Get them right lot by lot and the rest of Schedule 112A follows automatically.