Budget 2018: What does grandfathering mean?

Finance Minister Arun Jaitley on Thursday presented the new provisions of long-term capital gains (LTCG) tax in his 2018-19 Union Budget speech.

The finance minister said that the government would tax long term capital gains exceeding Rs 1 lakh at a rate of 10 percent, without giving any indexation benefits.

However, FM Jaitley added that all gains up to January 31, 2018 will be 'grandfathered'.

So, what is 'Grandfathering'?

The 'Grandfathering' clause is a special provision by which any entity can be exempted from a new law, rule or regulation.

This means the regulations would continue to apply in certain cases in the future. Usually, grandfathering is extended only to a limited number of people.

Such a provision is generally made in a bid to allow new regulations to be enforced without creating a chaos in the existing system.

Grandfathering in the LTCG context

In case of the new arrangement rolled out by the finance minister, grandfathering has been extended to people till a set time — January 31, 2018.

Hence, any gains made up to January 31 will not be taxed as they have been grandfathered.

However, gains made in the future, or beyond that specified date will be taxed according to the new LTCG tax regime.