While presenting the new provisions of long-term capital gains (LTCG), Finance Minister Arun Jaitley said that "I propose to tax such long term capital gains exceeding Rs1 lakh at the rate of 10% without allowing the benefit of any indexation. However, all gains up to 31 January 2018 will be grandfathered.” What is this grandfather the FM was talking about?
Well, a grandfather clause (or policy) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. “Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in. Often, such a provision is a compromise to allow new rules to be enacted without upsetting a well-established situation. ( grandfathering is like prospective as against retrospective)
In this case of 2018 LTCG, the FM imposed a 10% tax on long term capital gains. But, all gains up to 31 January 2018 will not be taxed. It has been grandfathered. Although the new rule would tax LTCG in the future, the current gains on investments done before a certain date are protected from the new tax, even after law is changed to make future gains taxable.
Like many evocative terms like blue-sky law or sunset clause, this concept too originated in the US. In the late 19th century, a number of US Southern states passed legislation and constitutional amendments that imposed a number of new requirements. In some cases these regulations exempted some of those whose ancestors (grandfathers) had the right to vote before the Civil War, from such requirements. The idea was to prevent poor and illiterate African-American former slaves and their descendants from voting, but allow poor and illiterate whites the right to vote. While the term has its origins in such discrimination, today it was used to protect equity holders from the new law.