My client bought listed shares in 2012 and sold them last year. How exactly do I work out the cost of acquisition under the grandfathering rule, and does the 31 January 2018 price simply replace the cost?
No — the 31 January 2018 price does not replace the cost, and it is not a straight 'higher of cost or market' either. The cost is the HIGHER of (i) the actual cost of acquisition and (ii) the LOWER of (A) the fair market value and (B) the full value of consideration; fair market value for a share listed on 31 January 2018 is the highest price quoted on a recognised stock exchange on that date.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2018-04-01, reported as Section 22, Finance Act, 2018; section 55(2)(ac), Income-tax Act, 1961. It bears on section 55(2)(ac), section 112A, section 48, section 2(42A), section 47, section 43(5) of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
The nesting is what gets mis-stated. Because limb (ii) takes the LOWER of the 31 January 2018 price and the sale price, the rule can never manufacture a loss out of a gain: if the share is sold below its 31 January 2018 price, the sale price is substituted, and the grandfathered cost cannot exceed what the client actually received. The clause applies only to a long-term capital asset being an equity share, a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, and only where it was acquired BEFORE 1 February 2018 — a share bought on 1 February 2018 or later takes its actual cost and nothing else. There is also a proviso for a share not traded on 31 January 2018: the highest price on the immediately preceding date on which it was traded is used.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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When section 112A brought long-term gains on STT-paid listed equity back into charge from 1 April 2018, Parliament protected gains that had accrued up to 31 January 2018 by inserting clause (ac) into section 55(2) by section 22 of the Finance Act 2018. The clause supplies a special cost of acquisition for a long-term capital asset of the kind referred to in section 112A acquired before 1 February 2018.
The cost of acquisition of such an asset, subject to sub-clauses (i) and (ii) of clause (b) of section 55(2), is the higher of the cost of acquisition of the asset and the lower of the fair market value of the asset and the full value of consideration received or accruing as a result of the transfer. 'Fair market value' means, for an asset listed on a recognised stock exchange as on 31 January 2018, the highest price of the asset quoted on that exchange on that date; where there was no trading in the asset on that exchange on 31 January 2018, the highest price on the immediately preceding date on which it was traded; and for a unit not listed as on that date, its net asset value as on that date; and for an equity share in a company which was not listed on a recognised stock exchange as on 31 January 2018 but is listed on such exchange on the date of transfer, an amount arrived at by indexing the cost of acquisition by reference to the Cost Inflation Index for the financial year 2017-18, under items (A), (B) and (C) of sub-clause (iii) of the Explanation.
The clause works as a two-level test. The inner test picks the lower of the 31 January 2018 fair market value and the sale consideration, which caps the notional uplift at what the seller actually realised. The outer test then compares that capped figure with the real cost and takes the higher, so an assessee whose actual cost exceeds the 31 January 2018 price keeps his real cost. The Explanation supplies three different measures of fair market value according to whether the asset was listed on 31 January 2018, was an unlisted unit, or was an equity share not listed on 31 January 2018 but listed on the date of transfer, the last being computed by indexing the cost of acquisition by reference to the Cost Inflation Index for 2017-18.
(ac) subject to the provisions of sub-clauses (i) and (ii) of clause (b), in relation to a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before the 1st day of February, 2018, shall be higher of- (i) the cost of acquisition of such asset; and (ii) lower of - (A) the fair market value of such asset; and (B) the full value of consideration received or accruing as a result of the transfer of the capital asset.
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Handle my notice → Ask a CA on WhatsAppNo — the 31 January 2018 price does not replace the cost, and it is not a straight 'higher of cost or market' either. The cost is the HIGHER of (i) the actual cost of acquisition and (ii) the LOWER of (A) the fair market value and (B) the full value of consideration; fair market value for a share listed on 31 January 2018 is the highest price quoted on a recognised stock exchange on that date. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 55(2)(ac), section 112A, section 48, section 2(42A), section 47, section 43(5) of the Income Tax Act 1961. It is reported as Section 22, Finance Act, 2018; section 55(2)(ac), Income-tax Act, 1961. The nesting is what gets mis-stated. Because limb (ii) takes the LOWER of the 31 January 2018 price and the sale price, the rule can never manufacture a loss out of a gain: if the share is sold below its 31 January 2018 price, the sale price is substituted, and the grandfathered cost cannot exceed what the client actually received. The clause applies only to a long-term capital asset being an equity share, a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, and only where it was acquired BEFORE 1 February 2018 — a share bought on 1 February 2018 or later takes its actual cost and nothing else. There is also a proviso for a share not traded on 31 January 2018: the highest price on the immediately preceding date on which it was traded is used. If it applies to you, the first step is this: Confirm the acquisition date is before 1 February 2018 and that the asset is one of the three kinds the clause names; otherwise stop, the clause does not apply.
When section 112A brought long-term gains on STT-paid listed equity back into charge from 1 April 2018, Parliament protected gains that had accrued up to 31 January 2018 by inserting clause (ac) into section 55(2) by section 22 of the Finance Act 2018. The clause supplies a special cost of acquisition for a long-term capital asset of the kind referred to in section 112A acquired before 1 February 2018. The matter was decided on 2018-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. The cost of acquisition of such an asset, subject to sub-clauses (i) and (ii) of clause (b) of section 55(2), is the higher of the cost of acquisition of the asset and the lower of the fair market value of the asset and the full value of consideration received or accruing as a result of the transfer. 'Fair market value' means, for an asset listed on a recognised stock exchange as on 31 January 2018, the highest price of the asset quoted on that exchange on that date; where there was no trading in the asset on that exchange on 31 January 2018, the highest price on the immediately preceding date on which it was traded; and for a unit not listed as on that date, its net asset value as on that date; and for an equity share in a company which was not listed on a recognised stock exchange as on 31 January 2018 but is listed on such exchange on the date of transfer, an amount arrived at by indexing the cost of acquisition by reference to the Cost Inflation Index for the financial year 2017-18, under items (A), (B) and (C) of sub-clause (iii) of the Explanation.
The clause works as a two-level test. The inner test picks the lower of the 31 January 2018 fair market value and the sale consideration, which caps the notional uplift at what the seller actually realised. The outer test then compares that capped figure with the real cost and takes the higher, so an assessee whose actual cost exceeds the 31 January 2018 price keeps his real cost. The Explanation supplies three different measures of fair market value according to whether the asset was listed on 31 January 2018, was an unlisted unit, or was an equity share not listed on 31 January 2018 but listed on the date of transfer, the last being computed by indexing the cost of acquisition by reference to the Cost Inflation Index for 2017-18. In the words reproduced by the source cited on this page: "(ac) subject to the provisions of sub-clauses (i) and (ii) of clause (b), in relation to a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before the 1st day of February, 2018, shall be higher of- (i) the cost of acquisition of such asset; and (ii) lower of - (A) the fair market value of such asset; and (B) the full value of consideration received or accruing as a result of the transfer of the capital asset."
It was decided by the CBDT Circulars & Instructions on 2018-04-01 and is reported as Section 22, Finance Act, 2018; section 55(2)(ac), Income-tax Act, 1961. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 55(2)(ac), section 112A, section 48, section 2(42A), section 47, section 43(5), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The cost of acquisition of such an asset, subject to sub-clauses (i) and (ii) of clause (b) of section 55(2), is the higher of the cost of acquisition of the asset and the lower of the fair market value of the asset and the full value of consideration received or accruing as a result of the transfer. 'Fair market value' means, for an asset listed on a recognised stock exchange as on 31 January 2018, the highest price of the asset quoted on that exchange on that date; where there was no trading in the asset on that exchange on 31 January 2018, the highest price on the immediately preceding date on which it was traded; and for a unit not listed as on that date, its net asset value as on that date; and for an equity share in a company which was not listed on a recognised stock exchange as on 31 January 2018 but is listed on such exchange on the date of transfer, an amount arrived at by indexing the cost of acquisition by reference to the Cost Inflation Index for the financial year 2017-18, under items (A), (B) and (C) of sub-clause (iii) of the Explanation. It arises in Capital Gains and How Tax Law Is Read matters, on section 55(2)(ac), section 112A, section 48, section 2(42A), section 47, section 43(5) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Write the computation out in the statutory order — actual cost; then the lower of the 31 January 2018 highest quoted price and the sale consideration; then the higher of those two results — and put that working in the reply, because assessing officers commonly reverse the inner and outer tests. Get the 31 January 2018 highest quoted price from the exchange on which the share was traded, and where there was no trade on that day, the highest price on the immediately preceding trading date, and keep the exchange printout on file. For a unit not listed on 31 January 2018, use the net asset value as on that date; do not use a quoted price. Where the equity share was NOT listed on 31 January 2018 but was listed by the date of transfer, do not look for a 31 January 2018 quote at all: sub-clause (iii) of the Explanation substitutes a figure arrived at by indexing the cost of acquisition to the Cost Inflation Index for 2017-18. Do not index the grandfathered cost — the second proviso to section 48 is not available for section 112A gains.
Still good law. Clause (ac) and its Explanation were read on the department's current section 55 page, stamped Year 2025, and agree word for word with the clause as inserted by section 22 of the Finance Act, 2018 and with the reproduction in an ITAT Mumbai order of 10 October 2025. Three independent reproductions agree on every limb. No amendment later than the page's own Year 2025 stamp was searched for. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Income Tax Department's CURRENT section 55 page is at https://incometaxindia.gov.in/w/section-55-64 — heading 'Meaning of ‘adjusted’, ‘cost of improvement’ and ‘cost of acquisition’', stamped Year 2025 — and it prints clause (ac) and its Explanation in full. Clause (ac) as printed there agrees word for word with the clause as inserted by section 22 of the Finance Act, 2018 and with the reproduction in the ITAT Mumbai order in Ramesh Jaisinghani (10 October 2025), which is already in the library and is used here only as a source of statutory text. Do NOT use /w/section-55, /w/section-55-1 or /w/section-55-2: those are stamped Year 2009, 2000 and 2001 and their sub-section (2) stops at clause (ab). The lettering point earlier flagged in the Ramesh Jaisinghani reproduction is resolved: the departmental page shows the Explanation as clause (a) with sub-clauses (i), (ii) and (iii), sub-clause (iii) carrying items (A), (B) and (C), which is what the Tribunal reproduced. This clause is about the COST; the rate and the exempt slice that then apply depend on which side of 23 July 2024 the transfer falls — see the section 112A entry, and note that the Rs 1,25,000 slice applies to the whole previous year and not only to post-23-July transfers. 'decided_on' is the date from which clause (ac) takes effect, not a decision date. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The cost of acquisition of such an asset, subject to sub-clauses (i) and (ii) of clause (b) of section 55(2), is the higher of the cost of acquisition of the asset and the lower of the fair market value of the asset and the full value of consideration received or accruing as a result of the transfer. 'Fair market value' means, for an asset listed on a recognised stock exchange as on 31 January 2018, the highest price of the asset quoted on that exchange on that date; where there was no trading in the asset on that exchange on 31 January 2018, the highest price on the immediately preceding date on which it was traded; and for a unit not listed as on that date, its net asset value as on that date; and for an equity share in a company which was not listed on a recognised stock exchange as on 31 January 2018 but is listed on such exchange on the date of transfer, an amount arrived at by indexing the cost of acquisition by reference to the Cost Inflation Index for the financial year 2017-18, under items (A), (B) and (C) of sub-clause (iii) of the Explanation.
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