If you have inherited physical shares that your father purchased several decades ago, subsequently converted them into demat form and sold them in 2026, determining the correct cost of acquisition can be complicated.
The tax treatment of inherited capital assets generally allows the heir to step into the shoes of the previous owner for determining the cost. However, special grandfathering provisions apply to listed equity shares and units of equity-oriented mutual fund schemes acquired before February 1, 2018.
How is the cost of inherited shares determined?
For an inherited capital asset, the cost of acquisition is generally taken as the cost at which the original owner acquired the asset.
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Where the original owner acquired the asset before April 1, 2001, the taxpayer can generally substitute the fair market value of the asset as on April 1, 2001, subject to the applicable tax rules.
Listed shares, however, have a separate grandfathering mechanism for assets acquired before February 1, 2018.
Under these provisions, the cost of acquisition of eligible listed equity shares is determined by taking the higher of the actual cost and the fair market value as on January 31, 2018, subject to the prescribed rules.
What value applies to listed shares?
For listed equity shares acquired by the original owner before February 1, 2018, the highest quoted price of the share on a recognised stock exchange on January 31, 2018, is relevant for determining the fair market value, where the prescribed conditions are satisfied.
Therefore, if your father purchased listed shares in the 1980s and you inherited them later, the grandfathering provisions can still apply when you sell those shares in 2026.
For units of equity-oriented mutual fund schemes, the applicable closing NAV as on January 31, 2018, is considered for determining the fair market value under the grandfathering mechanism.
Does the inheritance date affect grandfathering?
The grandfathering benefit is not lost merely because the shares were inherited after January 31, 2018.
The crucial factor is whether the original owner had acquired the eligible shares or units before February 1, 2018. The subsequent date on which the beneficiary inherited the securities does not, by itself, remove the benefit.
Consequently, if the original owner purchased the shares before the February 1, 2018 cut-off and the other conditions are met, the grandfathering provisions can be considered even if the inheritance took place later.
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Indexation benefit is not available for these listed equity shares and units of equity-oriented schemes.
Long-term capital gains (LTCG) on listed equity shares and equity-oriented mutual fund units are taxed at the applicable flat rate of 12.5% on gains exceeding the aggregate annual exemption threshold of ₹1.25 lakh, subject to the prevailing tax provisions.
The ₹1.25 lakh exemption applies to the aggregate long-term capital gains from listed equity shares and equity-oriented schemes covered by the provision, rather than separately to each individual investment.
Thus, in the case of inherited shares purchased by the original owner in the 1980s, the key considerations are the original acquisition date, the January 31, 2018 grandfathered value, the inheritance rules and the applicable long-term capital gains tax rate. The fact that the physical certificates were subsequently converted into demat form does not, by itself, change the underlying acquisition history.