How Section 90(7) steps up the cost of listed shares and MF units to their 31 Jan 2018 FMV, protecting pre-2018 gains from LTCG tax — with the master COA formula, three FMV determination cases, and fully worked examples for both listed shares (Mr. Prasun) and MF units (Mr. Raj).
Last updated: 8 July 2026
Long-term capital gains (LTCG) on listed shares and equity-oriented mutual fund units were completely tax-free until 31 March 2018. From 1 April 2018, they became taxable under Section 198 of the IT Act 2025. To avoid taxing gains that had already accrued during the tax-free period, Parliament introduced the grandfathering rule — the cost is stepped up to the Fair Market Value (FMV) on 31 January 2018, so only gains earned after that date are taxed.
31 Jan 2018 is the freeze date — gains up to this date are protected. 1 Apr 2018 is when LTCG tax started. Any appreciation between 31 Jan 2018 and the date of sale is the taxable portion.
Section 90(7) defines the deemed Cost of Acquisition (COA) for listed shares and MF units acquired before 1 Feb 2018. Master this single formula and every exam problem becomes plug-and-play:
Section 90(7) — The COA Formula (Grandfathering)
| Component | Value | Logic |
|---|---|---|
| Step 1 — B (inner) | Lower of (FMV on 31.01.2018, Sale Value) | Ensures the COA never exceeds the actual sale price — prevents artificial losses from the grandfathering step-up |
| Step 2 — COA (outer) | Higher of (Actual Cost, Step 1 result) | Ensures the COA is never lower than what was actually paid — prevents converting a real gain into a loss |
The formula has two safety valves: 'Lower of FMV/Sale' prevents an inflated FMV from creating a phantom loss; 'Higher of Cost/result' prevents the step-up from turning a real gain into a loss. Between them, the worst outcome is always zero gain — never a negative.
The FMV on 31.01.2018 is determined differently depending on whether the share or unit was listed on that date:
| Case | Situation | FMV = ? |
|---|---|---|
| Case 1 | Share / unit was listed on 31.01.2018 | Highest quoted price on the stock exchange on 31.01.2018 (or on the last trading day before it if the exchange was closed) |
| Case 2 | Share / unit was listed at the time of transfer, but NOT listed on 31.01.2018 | Actual Cost × (CII of 2017-18 [278] ÷ CII of the year of transfer) — indexed cost used as proxy |
| Case 3 | Unlisted MF unit (not listed even at transfer) | Net Asset Value (NAV) of the unit as published by the fund on 31.01.2018 |
The listing date — not the purchase date — determines which case applies. A unit bought in 2015 that was only listed on 1 Feb 2018 was NOT listed on 31.01.2018, so Case 2 applies (indexed cost), not Case 1 (highest price).
| Particulars | Value |
|---|---|
| Number of shares | 300 |
| Date of purchase | 20.05.2017 |
| Cost per share | ₹400 |
| Date of sale | 31.05.2026 |
| Sale price per share | ₹1,200 |
| Highest quoted price on 31.01.2018 (FMV) | ₹700 |
| STT paid on purchase and sale? | Yes → Section 198 applies |
| Step 1 — Lower of (FMV ₹700, Sale ₹1,200) = B | ₹700 |
| Step 2 — Higher of (Cost ₹400, B ₹700) = COA | ₹700 |
| Gain per share = Sale ₹1,200 − COA ₹700 | ₹500 |
| LTCG = ₹500 × 300 shares | ₹1,50,000 |
| Less: Annual exemption under Section 198 | (₹1,25,000) |
| Taxable LTCG | ₹25,000 |
| Tax @ 12.5% on ₹25,000 | ₹3,125 |
Mr. Raj bought 200 units each of Fund A and Fund B on 1.2.2017 at ₹550 per unit and sold all on 3.4.2026 at ₹900 per unit. The key difference: Fund A was listed on 1.1.2018 (so it was listed on 31.1.2018 ✓), while Fund B was listed on 1.2.2018 (so it was NOT listed on 31.1.2018 ✗). Same numbers — different FMV rule.
| Particulars | Value |
|---|---|
| FMV = Highest price on 31.01.2018 | ₹750 |
| Lower of (FMV ₹750, Sale ₹900) | ₹750 |
| Higher of (Cost ₹550, ₹750) = COA | ₹750 |
| LTCG = (₹900 − ₹750) × 200 units | ₹30,000 |
| Particulars | Value |
|---|---|
| FMV = NAV on 31.01.2018 | ₹950 |
| Lower of (NAV ₹950, Sale ₹900) | ₹900 |
| Higher of (Cost ₹550, ₹900) = COA | ₹900 |
| LTCG = (₹900 − ₹900) × 200 units | ₹0 |
| LTCG from Fund A | ₹30,000 |
| LTCG from Fund B | ₹0 |
| Total LTCG (A + B) | ₹30,000 |
| Annual exemption limit under Section 198 | ₹1,25,000 |
| Total LTCG ₹30,000 is within ₹1.25L limit → Tax payable | NIL |
Fund B's NAV on 31.01.2018 (₹950) exceeded the sale price (₹900), so the COA was capped at ₹900 — equal to the sale price. This gives zero capital gain, illustrating the 'Lower of FMV/Sale' safety valve protecting sellers from phantom losses.
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