The ‘Grandfathering’ clause is a special provision by which any entity can be exempted from a new law, rule or regulation. Usually, grandfathering is extended only to a limited number of people. Such a provision is generally made in a bid to allow new regulations to be enforced without creating a chaos in the existing system.
In the context of LTCG provisions in Budget 2018, grandfathering has been extended to people till a set time — January 31, 2018. Hence, any gains made up to January 31 will not be taxed as they have been grandfathered. However, gains made in the future, or beyond that specified date will be taxed according to the new LTCG tax regime.
It is clarified that Long-term Capital Gains on listed equities arising upto 31.01.2018 has been grandfathered for resident & non-resident assessees(incl. Foreign Institutional Investors). Refer clause 31 & 32 of Finance Bill, 2018 @PMOIndia @FinMinIndia @adhia03 @arvindsubraman
— Income Tax India (@IncomeTaxIndia) February 2, 2018
With the new law in force, now the investors would be liable to pay 10% tax on the profits made by selling their securities/ equity mutual funds at a price which is at least Rs. one lakh more than the price at which the shares were bought.
However, in order to avoid tax, one can’t afford to sell the shares before one year lapses, since that would attract short term capital gain (STCG), which is charged at the rate of 15%, a good 5% more than the rate of long term capital gain.
The only remedy is to sell the shares before the share prices rise over Rs. one lakh over the cost price. Only in that case, one would be exempt from paying capital gain tax, but that too if the shares are sold after a year or more.
If an equity share is purchased six months before 31st January, 2018 at Rs 100/- and the highest price quoted on January 31 2018 in respect of this share is Rs 120/-, there will be no tax on the gain of Rs 20/- if this share is sold after one year from the date of purchase. However, any gain in excess of Rs 20 earned after January 31, 2018 will be taxed at 10% if this share is sold after July 31, 2018. The gains from equity share held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15%.
There is no need to sell equities in hurry. An investor do maintain records on the market price and quantity of all the stocks own as on January 31, for the taxman. When equities are sold many years later, it is needed to calculate the LTCG tax.
In fact, there is one good option to sell all equity holdings before April 1 and buy them back immediately. That way, the gains get locked in, needn’t pay LTCG tax and don’t have to do this paperwork either.