BTL 845 - Grandfathering Rule

 

The Banking Tutor’s Lessons

BTL 845                                                                                                30-11-2025

Grandfathering Rule

A Grandfathering rule (or "grandfather clause") is a provision in a new law or regulation that allows certain existing situations, individuals, or businesses to continue operating under old rules, effectively exempting them from the new restrictions. This is done to provide stability, ensure fairness for those who made commitments based on prior law, and prevent undue hardship from sudden changes.

The primary purpose is practicality and fairness, allowing a smooth transition to new regulations without penalizing those already in compliance with the previous system.

Grandfather clauses are found in various legal contexts, including zoning laws, environmental regulations, employee benefits (like sick leave), and taxation.

Exemption for Existing Conditions: It exempts those who were already engaged in a specific activity or possessed certain rights before the new rule was enacted.

Non-Retroactive: The primary purpose is to ensure that new laws are applied prospectively (forward-looking), preventing them from unfairly affecting past actions or established situations.

Temporary or Permanent: The exemption may be permanent (e.g., an existing building not needing to be immediately updated to new building codes) or temporary (e.g., a grace period to comply with new emission standards). 

Common Applications: Grandfather clauses are commonly found in zoning laws, tax codes, insurance policies, and professional licensing requirements

Exemptions can be permanent, temporary, or subject to specific limitations, such as an existing business being allowed to stay but not expand.

Common Examples

Emissions Requirements: Older cars might be exempt from strict new emissions tests that newer models must pass.

Taxation (Capital Gains): A significant modern example is in India's income tax law for long-term capital gains (LTCG) on equity shares. When a tax was introduced in 2018 on gains exceeding ₹1 lakh, a grandfathering clause ensured that any gains accrued before January 31, 2018, were exempt from the new tax. This protected investors from being taxed on appreciation that occurred when such gains were not taxable.

Employee Benefits: Existing employees might retain an older, more generous sick leave policy, while new hires fall under a revised plan.

Sekhar Pariti

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