Grandfathering Rule is the LTCG-tax provision introduced in Budget 2018 that protects investors from being taxed on gains accrued on listed equity and equity-MF holdings before 31 January 2018, when the long-term capital gains tax was reintroduced after a 14-year exemption.
Mechanism: For equity bought on/before 31 Jan 2018 and sold after 1 Apr 2018, the cost of acquisition is the HIGHER of (a) actual purchase price, and (b) the lower of (i) FMV on 31 Jan 2018 and (ii) sale price. This ensures pre-31-Jan-2018 gains are NOT taxed.
Example: Bought Infosys at Rs.500 in 2010, FMV on 31 Jan 2018 was Rs.1,200, sold in 2025 at Rs.1,800. Grandfathered cost = max(500, min(1200, 1800)) = Rs.1,200. Taxable LTCG = Rs.1,800 - Rs.1,200 = Rs.600 per share (not Rs.1,300).
When relevant: Any listed equity, equity-oriented MF, or ETF purchased on/before 31 Jan 2018 and still held. Brokers/AMCs auto-apply grandfathering in the AIS and capital-gains statement, but always cross-check with NSE/BSE historical 31-Jan-2018 closing prices.
SEBI caveat: Post-Budget 2024, LTCG on listed equity is 12.5% above Rs.1.25 lakh per year (up from 10% above Rs.1 lakh). Grandfathering still applies to the cost base; only the rate and threshold changed.
Related: LTCG, STCG, Indexation Benefit, ELSS.