Tax on Inherited Property: Is Inheritance Taxed, and What Happens When You Sell It?
India does not have an inheritance tax — receiving a property from a parent or relative through inheritance or a will does not, by itself, attract any income tax. But the moment you SELL that inherited property, capital gains tax kicks in, calculated using rules that often confuse people: your 'cost' isn't what you paid (you paid nothing), and your holding period doesn't start when you inherited it. Here's how it actually works.
Step 1: Inheritance Itself Is Not Taxable
Under Section 56(2)(x), property received under a will or by way of inheritance is specifically excluded from being taxed as 'income from other sources' — regardless of the property's value. So if you inherit a flat worth ₹2 crore from your father, there is no tax payable at the time of inheritance, and no requirement to report this as income in that year (though high-value inheritances may be relevant for other purposes, such as wealth disclosure in certain contexts).
Step 2: Selling Inherited Property — Capital Gains Apply
When you eventually sell the inherited property, capital gains tax applies — the gain being the difference between the sale price and the 'cost of acquisition', computed using special rules for inherited assets.
Cost of Acquisition for Inherited Property
Since you didn't 'buy' the property, your cost of acquisition is deemed to be the cost to the previous owner who actually acquired it (e.g., your father's original purchase price, or if HE also inherited it, his predecessor's cost, tracing back as needed). If the property was acquired by the previous owner before 1 April 2001, the taxpayer has the option to take the Fair Market Value (FMV) as on 1 April 2001 as the cost of acquisition instead.
Holding Period: Counted From the ORIGINAL Owner's Acquisition
For determining whether the gain is short-term or long-term, the holding period INCLUDES the period for which the property was held by the previous owner(s) — not just the period since you inherited it. So if your father bought the property in 1995 and you inherited it in 2020 and sold it in 2026, your holding period is deemed to run from 1995, making it almost certainly a long-term capital gain regardless of how recently you inherited it.
Indexation (For Properties Acquired Before 23 July 2024)
Following the changes introduced in Budget 2024, the indexation benefit (adjusting the cost of acquisition for inflation using the Cost Inflation Index) for property has been modified. For property (including inherited property where the chain of ownership traces back to before 23 July 2024) acquired before this date, taxpayers may have an option between the old regime (20% with indexation) and the new regime (12.5% without indexation) for computing long-term capital gains tax, subject to the conditions notified by the government. Given the complexity and the significance of this choice for inherited property with a long holding history, this computation should be done carefully with professional help.
Exemptions Still Available
Capital gains on sale of inherited residential property can still be reduced using standard exemptions, such as:
- Section 54: reinvesting in another residential house
- Section 54EC: investing in specified bonds (NHAI/REC) within 6 months
Multiple Legal Heirs: Reporting Gains
If a property is inherited jointly by multiple legal heirs and subsequently sold, each heir reports their proportionate share of the capital gain in their own ITR, based on their share of the sale proceeds — not the full gain reported by one heir alone.