You sell a holding your family has had since 2013 — four hundred shares that cost ₹210 each, ₹84,000 in all, sold at ₹1,150 for ₹4,60,000. The profit is ₹3,76,000 and you have already worked out roughly what the tax on it will be. Then the broker's capital gains statement puts the long-term gain at ₹2,04,000, a little over half of what you calculated. Nothing has been miscounted, no corporate action has intervened, and the statement is right. A single provision inserted into the income-tax law in 2018 has replaced the ₹210 you paid with a different figure, and the substitution is not a concession anybody applied for. It is arithmetic, it runs on a date, and in one very common situation it produces a result that surprises people in the opposite direction.
The electricity board replaces the old meter on your wall. Before it goes, the meter reader writes down the final reading and the file records it. From the next bill onward you are charged on units measured by the new meter. The old units were not forgiven and they were not billed again — they were already settled under the arrangement that applied while the old meter was running. The reading noted down that day is the line between the two systems, and everything about your bill afterwards is measured from it.
Long-term gains on listed shares were not taxed at all until this rule changed. Rather than reach back and tax two decades of accumulated gain, the law wrote down a reading: the value of each share on 31 January 2018. From that date the gain is measured, and the rise that had already happened stays outside. The important half of the analogy is the last sentence — the number written down that day is not a valuation of your holding and not an alternative purchase price you can use as you please. It is a line, and it only works in one direction.
What changed, and why there had to be a transition rule
For years a long-term gain on a listed share on which STT had been paid was exempt from tax outright. Somebody who had bought in 2003 and sold in 2017 paid nothing on the gain. The Finance Act 2018 removed that exemption and brought long-term gains on listed equity and on units of an equity-oriented fund into charge from the following financial year. That created an obvious problem of fairness. A holder in January 2018 had made investment decisions across fifteen years under a rule that said the gain would not be taxed; taxing all of it now would be taxing accrued gains retrospectively in substance if not in form. So the same Act inserted a special rule for computing the cost of acquisition of anything in this class acquired before 1 February 2018.
The rule, in three steps
- what you actually paid
- The real cost of that particular lot, on the date it was actually bought. This is the figure the provision may replace, and it is also the floor below which it cannot go.
- value on 31 January 2018
- For anything that was listed on that date, the highest price quoted on a recognised stock exchange — and if it did not trade that day, the highest price on the last day before it on which it did. The net asset value of 31 January 2018 is the figure only for a unit that was not listed then, which is the ordinary fund bought from the fund house. An exchange-traded fund was listed, so it takes the quoted-price limb like a share, not its NAV.
- price you sold at
- The full value of the consideration you actually received. Which is why the deemed cost cannot be known in advance: one of its three inputs does not exist until the day you sell.
Example: Paid ₹210; value on 31 January 2018 ₹640; sold at ₹1,150. The inner step takes the lower of ₹640 and ₹1,150, giving ₹640. The outer step takes the higher of ₹210 and ₹640, giving ₹640. The deemed cost is ₹640, so the taxable gain is ₹510 a share on an actual profit of ₹940.
The two steps do different jobs, and reading them in the right order is the whole of understanding the provision. The inner step caps the substituted cost at the price you actually got, so the rule can never invent a loss out of a sale that made money. The outer step floors it at what you really paid, so the rule can never take away a loss you genuinely suffered. Between those two guards there is exactly one thing the provision can do: raise your cost up towards the 31 January 2018 value, and no further.
| Where you sell, relative to the two numbers | What the rule produces | The consequence people do not expect |
|---|---|---|
| Above the 31 January 2018 value | The deemed cost is the 2018 value, so only the rise after that date is taxed | The gain on your statement is genuinely smaller than the profit in your bank account, and both figures are correct. This is the case the rule was written for |
| Between what you paid and the 31 January 2018 value | The inner step caps the deemed cost at the sale price, so cost equals consideration and the gain is exactly nil | Neither a gain to tax nor a capital loss to set off. Somebody selling here in order to book a loss against the 2018 value gets nothing whatsoever, and has sold a holding for no reason |
| Below what you actually paid | The outer step restores your real cost, because it is the higher of the two figures | A genuine economic loss survives intact and is available for loss set-off in the ordinary way. The provision cannot take a real loss away from you |
| A lot bought on or after 1 February 2018 | The provision does not apply. The cost is what you paid, full stop | The same scrip in the same account can hold two lots with two entirely different costs, and FIFO decides which of them is treated as having been sold |
The narrow print worth knowing
- It belongs to the long-term computation only. A share bought in 2013 and sold in 2026 is long-term and gets the deemed cost. If you were somehow computing a short-term gain on this class of asset, the cost is what you paid — the provision has no application there.
- It applies to the class the concessional long-term regime covers — listed equity shares and units of an equity-oriented fund on which securities transaction tax has been paid, with notified exceptions for certain ways of acquiring shares. It is not a general rule for every asset you happened to own in January 2018.
- Nothing allotted afterwards inherits it. Bonus or rights shares allotted in 2021 on a holding bought in 2011 are themselves acquired in 2021. They are on the wrong side of the date and they take their cost from the ordinary rules, which for a bonus share is nil.
- A share that was not quoted on that date is dealt with by a separate limb of the same provision, which works differently. If your holding was unlisted in January 2018 and listed later, the ₹640-style figure in this lesson does not exist for it and the question is a different one.
- The rate and the annual exemption are not what this lesson is about. Both have been changed since 2018 and will be changed again. The deemed-cost rule and the date it turns on have not moved, which is why the cost figure is the durable part and the rate is the part to look up.
Why the statement may not apply it at all
The provision needs two facts about your holding that no depository stores: the date it was bought and the price paid. A broker's capital gains statement computes the deemed cost automatically for shares it watched you buy, because it has both. For a holding that arrived some other way it has neither, and it does not stop and ask. Three ordinary situations produce a confidently wrong figure, and all three are situations in which the shares are old — which is to say, exactly the situations in which the provision matters most.
- Shares transferred in from another broker. The transfer date lands in the platform as though it were the purchase date. A 2011 holding moved in 2023 looks like a 2023 purchase, which puts it on the wrong side of February 2018 and, worse, can make a long-term gain look short-term. The lesson on changing broker in this track deals with the paperwork that prevents this.
- Shares dematerialised from physical certificates. The depository records the date of credit. Nothing in the electronic record knows about a certificate issued in 1996.
- Shares received in a merger, demerger or inheritance. The cost and the clock come from somewhere the platform cannot see, and the module on the record behind the holding works through where they actually come from.
The share is at ₹520 and you want a loss this year
You hold 400 shares bought in 2013 at ₹210. The highest quoted price on 31 January 2018 was ₹640. The share is now ₹520. You have a long-term gain of ₹4,00,000 elsewhere this year, comfortably past the annual exemption, and you would like something to set against it. A relative points out that the share is ₹120 below its January 2018 value.
You hold 500 shares bought in 2014 at ₹150. The highest quoted price on 31 January 2018 was ₹480. You sell all 500 at ₹400. What is the long-term capital gain or loss?
2013 mein 400 share ₹210 ke — kul ₹84,000. Aaj ₹1,150 pe beche = ₹4,60,000, matlab jeb mein profit ₹3,76,000. Par statement kehta hai gain sirf ₹2,04,000. Galti nahi hai. Pehle listed share ka long-term gain tax-free tha; 2018 mein rule badla, aur purana hisaab chhodne ke liye kanoon ne ek reading likh li — 31 January 2018 ka bhaav, yahan ₹640. Formula do step ka hai: cost = (jo aapne diya) aur (31 Jan 2018 ka bhaav ya bechne ka daam — in dono mein se chhota), in dono mein se bada. Yahan andar wala chhota = ₹640, bahar wala bada = ₹640. Toh cost ₹640 maani gayi, gain ₹510 per share, aur 2013 se Jan 2018 tak ka ₹1,72,000 kisi ne tax hi nahi kiya. Ab woh baat jispe log phaste hain: ₹520 pe becho toh gain exactly zero hota hai — ₹48,000 ka nuksaan NAHI, kyunki andar wala step cost ko bechne ke daam pe hi rok deta hai. Matlab ₹640 dekh kar "chalo loss book kar lete hain" sochna sirf brokerage ka kharcha hai. Ulta bhi sach hai: ₹180 pe becho toh aapka asli ₹210 hi cost rehta hai aur ₹12,000 ka sachcha long-term loss poora milta hai. Yeh rule kabhi jhoota loss banata nahi, aur kabhi sachcha loss cheenta bhi nahi. Ek baat aur — 1 February 2018 ke baad khareede lot pe yeh rule lagta hi nahi, aur FIFO se purana lot pehle jaata hai. Toh ek kaam aaj kar lo: Feb 2018 se purani har holding ki khareed ki tareekh, khareed ka daam, aur 31 Jan 2018 ka highest bhaav likh kar contract note ke saath rakh do — teesra number ab kabhi badlega nahi.
- For listed equity and equity fund units acquired before 1 February 2018, the cost used is the higher of what you paid and the lower of the 31 January 2018 value and your sale price.
- The inner cap means the rule can never create a loss; the outer floor means it can never remove a real one.
- Selling between your actual cost and the 31 January 2018 value produces exactly nil — no gain to tax and no loss to set off.
- Nothing acquired on or after 1 February 2018 gets the rule, including bonus shares allotted later on an old holding.
- The rule needs the purchase date and price, which no depository holds — so a transferred or dematerialised holding is where the statement goes wrong.
Mark it done to track your progress through the curriculum.