Grandfathering In MF

Consider a simple scenario – you had purchased some mutual fund units before 31st January 2018, and you sold those units sometime after 1st April 2018 (assuming in the meantime more than a year has passed between the purchase and sale date) – then how your long term capital gains will be calculated and taxed? Let us understand this in an easy way through example and without any complication. Read on.

Taking a cue from the above example, let’s say you purchased one unit of ABCD mutual fund scheme at a price of Rs. 10 on 1st September 2016. You sold the same on 1st August 2023 at a price of Rs. 22. So, what is the capital gain in this case. To find out that, we also need to know the NAV of the scheme as on 31st January 2018. Why? That is because gain made from 1st Feb to sale date would only be taxed.

Capital Gain = Sale Price – Cost of Acquisition

There is no confusion here on ‘Sale Price’. But how is ‘Cost of Acquisition’ calculated? Let us express that in form of an Excel function.

Cost of Acquisition = MAX ( MIN (31st Jan 2018’s NAV, Sale NAV), Purchase NAV)

Let us now calculate capital gain 3 different scenarios.

Scenario 1:

Purchase NAV = 10; NAV as on 31st Jan 2018 = 15; Sale NAV = 22

Cost of Acquisition = MAX ( MIN ( 15, 22), 10) = MAX ( 15, 10) = 15

Therefore, Long Term Capital Gain = Sale NAV – Cost of Acquisition = 22 – 15 = 7

[This is going to be the most likely scenario in maximum cases]

Scenario 2:

Purchase NAV = 10; NAV as on 31st Jan 2018 = 22; Sale NAV = 15

Cost of Acquisition = MAX ( MIN ( 22, 15), 10) = MAX ( 15, 10) = 15

Therefore, Long Term Capital Gain = Sale NAV – Cost of Acquisition = 15 – 15 = 0

Scenario 3:

Purchase NAV = 10; NAV as on 31st Jan 2018 = 22; Sale NAV = 8

Cost of Acquisition = MAX ( MIN ( 22, 8), 10) = MAX ( 8, 10) = 10

Therefore, Long Term Capital Gain = Sale NAV – Cost of Acquisition = 8 – 10 = -2

Hope, this clarifies.