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Section 55 (2) (ac) (Cost of Acquisition)

The section 55(2) (ac) is referred as Grand Fathering provision.

Before going into the topic of Section 55(2) (ac), let’s have a sharp look into the provision of new section 112A which is applicable from FY 2018-19 in order to understand the current topic.

Here we can notice a new regime of taxation of Long Term Capital Gains on sale of equity share, unit of equity-oriented funds and unit of the business trust u/s 112A of the Income Tax Act, 1961 with effect from 01.04.2018.

From FY 2018-19, provisions of 112  A shall be applicable to income arising from transfer of such said assets,  where the STT (Securities Transaction Tax) has been paid at the time of transfer (in case of equity shares, STT has to be paid both at the time of acquisition and transfer).

So, with effect from FY 2018-19, the provisions of 10(38) are not applicable to any income arising from transfer of equity shares/equity-oriented funds/units of business trust, where the gains on such transfer were exempt from tax up to FY 2017-18.

Rate of tax u/s 112A: As per sec. 112A(2), long term capital gain should be taxed @10% on capital gains exceeding one lakh rupees. So, long term capital gains up to Rs. 1 Lakh is exempt from Tax w.e.f 01.04.2018.

As per the Grand Fathering Provision, if an equity share or an equity-oriented fund or a unit of business trust (as referred u/s 112A) being a long term capital asset, acquired on or before 31-01-2018, then the cost of acquisition shall be higher of the following:-

A. The cost of acquisition of such asset; 

B. Lower of –

i. the fair market value of such asset; 

ii. sale consideration on such transfer of capital asset.

Here the Fair Market Value (FMV) means-

  • If the asset is listed on any recognised stock exchange as on 31-01-2018, the highest price of such asset quoted on such exchange on 31-01-2018 shall be the FMV. If the asset is not traded on such date, FMV shall be the highest price quoted on such exchange on a date immediately preceding to 31-01-2018 when such asset was traded on such exchange.
  • In case if capital asset is a unit which is not listed, then the net asset value as on 31-01-2018 shall be the FMV.
  • In case where the capital asset is an equity share in a company which is –

i) not listed on a recognized stock exchange as on the 31st day of January 2018 but listed subsequently on the date of transfer

ii) listed on recognised stock exchange on date of transfer and became the property of the assessee in consideration of share which is not listed on such exchange as on 31st day of January, 2018 by way of transaction not regarded as transfer under sec.47,

- an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later.

However, the said grand fathering provision 55(2)(ac) is subject to the sub clauses of (i) & (ii) of clause (b) of Section 55(2).

The below example under various situations will give you more clarity.


*Long term Capital Gains up to Rs. 1 Lakh is exempt u/s 112A and the balance shall be taxed @10%.