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Income Tax · Capital gainsInherited property sale: cost, holding period and capital gains
Receiving a property by inheritance is not taxable – but selling it is. The law lets you step into the previous owner's shoes for cost and holding period. Here is how to compute the gain, use the 2001 fair market value, choose indexation and claim exemptions.
Property often passes from parents to children through a will or by succession. Receiving it is not taxable: gifts received on inheritance are excluded from income. Selling it later attracts capital gains tax. The law, through Section 49 of the 1961 Act (carried into the 2025 Act), treats the heir as standing in the shoes of the previous owner.
The three key rules
- Cost = cost to the previous owner who last acquired the property by a taxable mode (purchase), plus improvements by any owner.
- Holding period includes the period for which the previous owner(s) held it.
- FMV as on 1 April 2001 can replace cost if the property was acquired before that date (capped at the stamp duty value as on 1 April 2001).
Long-term or short-term?
Because the holding period includes the previous owner's, almost all inherited land and buildings are long-term (held for more than 24 months), even if sold the day after inheritance.
The rate options
For transfers from 23 July 2024, LTCG on land or building is taxed at 12.5% without indexation. Resident individuals and HUFs can opt for 20% with indexation if the property was acquired before 23 July 2024 – for inherited property, the acquisition date relevant for this option is generally the previous owner's acquisition.
Indexation – which base year?
The indexed cost = cost × CII of year of sale ÷ CII of the year of acquisition (or 2001-02 if FMV of 2001 is used). The Bombay High Court in CIT v. Manjula J. Shah held that indexation runs from the year the previous owner first held the asset. Some assessing officers take the year of inheritance. Where the property was acquired by the previous owner before 2001, using FMV as on 1 April 2001 with CII 100 avoids the dispute.
Worked example
Example: Late Mr Grewal bought a house in Model Town in 1988 for ₹4,00,000. His valuer-estimated FMV as on 1 April 2001 is ₹35,00,000 (stamp duty value on that date ₹38,00,000). He died in 2019; his son Amandeep and daughter Simran inherited it equally under his will. They sell it in January 2026 for ₹3,40,00,000, paying brokerage of ₹3,40,000.
| Option A (12.5%, no indexation) | Option B (20%, indexation from 2001-02) | |
|---|---|---|
| Net consideration | ₹3,36,60,000 | ₹3,36,60,000 |
| Cost (FMV 1-4-2001) | ₹35,00,000 | ₹35,00,000 × 376/100 = ₹1,31,60,000 |
| LTCG | ₹3,01,60,000 | ₹2,05,00,000 |
| Tax | ₹37,70,000 | ₹41,00,000 |
Here Option A is cheaper by ₹3.3 lakh, because appreciation since 2001 far outstripped inflation. Each heir reports half the gain (₹1,50,80,000) and pays 12.5% on it, plus surcharge and cess – before exemptions.
Exemptions: each heir can reduce tax by investing in a residential house under Section 54 (up to the ₹10 crore cap) and/or up to ₹50 lakh in Section 54EC bonds within six months.
Documents you need
- Death certificate and will, or succession certificate / legal heir certificate.
- Probate, if required (in Delhi, probate is generally not mandatory for wills of Hindus, Sikhs, Jains and Buddhists for property in Delhi – check with a lawyer).
- Mutation in municipal / land records in heirs' names.
- Original purchase deed of the previous owner.
- Registered valuer's report for FMV as on 1 April 2001.
- Proof of improvements with dates.
Joint heirs and family arrangements
- Each heir computes and pays tax on their share.
- A family settlement dividing inherited property among heirs, without consideration, is generally not a transfer.
- If one heir buys out another's share, the selling heir has a capital gain; the buying heir's cost for that share is the price paid.
Inherited property and stamp duty value
If the sale price is lower than the stamp duty value by more than 10%, the stamp duty value is taken as the sale consideration under Section 50C. See Section 50C explained.
NRI heirs
If an heir is a non-resident, the buyer must deduct TDS under Section 195 (Section 393(2) of the 2025 Act) on the gain at the applicable rate. Repatriation of sale proceeds of inherited property is permitted up to USD 1 million per financial year from the NRO account, with Form 15CA/15CB. See NRI property sale.
Common mistakes
- Treating the inheritance date as the purchase date and paying short-term tax.
- Taking cost as nil because the property was "free".
- Not getting a valuation report for 2001 FMV.
- Missing the 2-year/3-year reinvestment windows for Section 54.
Key takeaway
For an inherited property, use the previous owner's cost (or 2001 FMV), include their holding period and compute tax under both rate options. Each heir can then plan Section 54/54EC exemptions on their share. Our capital gains service handles valuation coordination, computation and reinvestment planning.
Official references
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
Is inheritance taxable in India?
No. There is no inheritance or estate tax, and property received under a will or by succession is exempt from tax as a gift. Tax arises only when the inherited property is sold.
What is the cost of inherited property?
The cost to the previous owner (who acquired it by purchase). If that owner acquired it before 1 April 2001, the fair market value on 1 April 2001 (capped at the stamp duty value on that date) can be taken.
From which year is indexation computed for inherited property?
Courts, including the Bombay High Court in Manjula J. Shah, have held that indexation runs from the year the previous owner first held the asset. The department often applies the year of inheritance, so the issue may need to be argued.
Can heirs claim Section 54 exemption on sale of an inherited house?
Yes. Each heir who sells their share of a long-term residential house can claim Section 54 by investing their gain in a new residential house within the time limits.
Is stamp duty payable on inheritance in Delhi?
Inheritance under a will or succession is not a sale; mutation of records is required. A family settlement or relinquishment deed may attract stamp duty depending on the document.
Can the heirs claim cost of improvement made by the deceased?
Yes. Improvements made by the previous owner (and by heirs) after 1 April 2001 are added to cost, with evidence.
Is the date of death relevant for capital gains?
Not for holding period or cost, which follow the previous owner. It matters for legal title and documentation.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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