LTCG tax calculation AY 2026-27: Grandfathering won't save you from surcharge. Here's why

• Option A: Tax at 20% with indexation

• Option B: Tax at 12.5% without indexation

However, this grandfathering provision will not save you from surcharge if your total income, including the gains from property sale, at 20% with indexation, exceeds ₹50 lakh.

"Though the assessee can save the tax liability in respect of the capital gains due to the grandfathering provisions, the surcharge shall be levied as it depends upon the quantum of the total income," Taxmann Advisory and Research Team said in a report.

Suppose Mr. A earned a salary of ₹40 lakh in FY 2025-26 and sold a property bought in 2015. His LTCG was ₹5 lakh with indexation and ₹15 lakh without indexation. He opted for the grandfathering rule and paid tax on ₹5 lakh, but his ITR showed total income as ₹55 lakh (₹40 lakh + ₹15 lakh), attracting a 10% surcharge.

While Mr. A may think the ITR utility has incorrectly calculated the surcharge, the report says there is nothing wrong in the calculation of the Income Tax Department.

Under the grandfathering provision, the excess amount can be ignored if the amount of tax under Option B exceeds the amount of tax under Option A.

"The grandfathering provision allows the relief by providing that 'such excess shall be ignored', which clearly indicates that if the tax computed under the new rate, i.e., 12.5% without indexation, exceeds the tax payable under the pre-amendment provisions, i.e., 20% with indexation, the excess amount calculated as per the new rate is to be ignored," the report said.

The report further said that the net effect is that only the lower tax computed as per the amended or pre-amended provisions shall be payable.

Thus, this grandfathering provision offers relief only in terms of tax liability, not in terms of computation methodology,

"Accordingly, LTCGs shall be computed and added to the total income without applying the indexation benefit, as provided by the amended law. As the long-term capital gain, computed as per the new provision, is added to the total income, and in case it exceeds the surcharge threshold limit, the surcharge is charged by the utility," the report said.

When does grandfathering apply?

There are four important points that taxpayers should know:

1)The grandfathering provision applies only to resident individuals and resident Hindu Undivided Families (HUFs). A non-resident person, company, partnership firm or any other assessee is not eligible for this benefit.

2)This provision applies only to the transfer of a long-term capital asset, being land or building or both. It does not cover other long-term capital assets, such as gold or bullion.

3)To be eligible for the grandfathering provision, the land or building must have been acquired on or before July 22, 2024.

4)This provision is applicable if the tax on LTCG from the transfer of such land or building computed under the new LTCG regime exceeds the tax computed under the old LTCG regime.