Inheriting a property—whether it’s your parents’ flat in Mumbai or ancestral land in your hometown—does not create any tax liability at the time of inheritance. The Income Tax Act makes it clear: there is no tax when the property passes to you. The issue arises only when you decide to sell the inherited asset.
When you sell, the profit is treated as a capital gain. But unlike a property you bought yourself, here the law allows you to step into the shoes of the previous owner. That means both the cost of acquisition and the holding period are carried forward from the person you inherited it from.
“The cost and date of acquisition and holding period is considered from the cost and date of acquisition by the original owner and, for older properties acquired prior to April 2001, there is also the option of using fair market value as of 1 April 2001 for the cost,” pointed out Gautam Nayak, partner at CNK & Associates.
For older properties—those acquired before 1 April 2001—you can take the fair market value (FMV) as of that date as your cost, which can make a big difference in reducing taxable gains.
You can also add brokerage costs incurred on the property sale and cost of improvement. “Remember, if you are taking fair market value as of 1 April 2001, then the cost of improvement incurred should be after that date,” said Prakash Hegde, Bengaluru-based chartered accountant.
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Long-term gains and new rules
Since inherited properties are usually held for long, they qualify as long-term capital assets. This brings them under the long-term capital gains (LTCG) framework.
Recent tax changes now give resident Indians two options: pay 20% tax with the benefit of indexation (where the cost is adjusted for inflation), or opt for a simpler 12.5% flat tax without indexation. For non-resident Indians (NRIs), however, the choice is gone—they are taxed at 12.5% flat, with no indexation benefit.
“From 23 July 2024, the indexation benefit on long-term capital gains has been largely withdrawn. The only exception is for land and buildings purchased before that date but sold afterwards. In such cases, resident individuals and HUFs can choose between paying 12.5% on the unindexed gains or 20% with indexation,” said Balwant Jain, Mumbai-based tax and investment expert.
Tax math
Imagine your father bought a flat in 1998 for ₹10 lakh. For tax purposes, you can use the FMV as of 1 April 2001, say ₹20 lakh. If you had sold the flat in March 2025 for ₹1.2 crore, your indexed cost becomes about ₹72.6 lakh after adjusting for inflation. After deducting expenses like brokerage, the taxable gain works out to roughly ₹45.4 lakh.
At 20% with indexation, you’d pay about ₹9.08 lakh in tax. But if you opted for the flat 12.5% route, the gain would shoot up to nearly ₹98 lakh and tax to about ₹12.25 lakh. Clearly, the indexed route saves you more in this case.
Exemptions available
There are also ways to soften the tax blow. If you reinvest the gains in another residential property within the prescribed timelines, or invest in capital gains bonds under Section 54EC or another residential property under Section 54F, you can claim exemptions. These provisions often make sense if you don’t want to lose a chunk of your inheritance to taxes.
“But remember, you need to invest the unindexed long-term capital gains to avail the tax exemption,” Jain added.
The sale of inherited property does invite capital gains tax, but the actual liability depends on which tax route you opt for. Residents must check which tax option works better, while NRIs need to plan around the flat 12.5% levy, but they can still avail of the fair market value benefit if property is bought before 1 April 2001.
