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.
⚠ Keep documentation of the ORIGINAL owner's purchase records or a registered valuer's FMV report as on 1 April 2001 if applicable — without this, establishing the cost of acquisition for an inherited property (especially one bought decades ago by a parent or grandparent) can be very difficult, potentially resulting in the entire sale price being treated as gain in the absence of evidence.
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.
ExampleRahul's grandfather bought a plot in 1985 for ₹50,000. Rahul's father inherited it in 2005 (no tax then). Rahul inherited it in 2022 (no tax then). Rahul sells it in 2026 for ₹80 lakh. Rahul's cost of acquisition is ₹50,000 (1985 cost) — or he can opt for the FMV as on 1 April 2001 if that's higher, with appropriate valuation. His holding period is deemed to run from 1985 (his grandfather's acquisition), making this clearly a long-term capital gain. The applicable indexation/tax-rate option (20% with indexation vs 12.5% without) would then need to be evaluated.
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.
Frequently Asked Questions
I inherited a flat from my mother last year — do I need to pay any tax or declare anything in my ITR for that year? ▼
No tax is payable on the inheritance itself, and there's no specific requirement to declare the receipt of inherited property as 'income' in your ITR for that year — Section 56(2)(x) specifically excludes property received by inheritance or under a will from being taxed as income. However, once you START earning any income from that property (e.g., rental income) or eventually SELL it, those subsequent transactions become taxable in the respective years, and the property itself should be reflected in your Schedule AL (Assets and Liabilities) if your income exceeds the threshold requiring that schedule.
How do I find out the cost of acquisition for a property my grandfather bought in the 1970s, if there are no records? ▼
If original purchase records aren't available and the property was acquired before 1 April 2001, the law allows you to use the Fair Market Value (FMV) as on 1 April 2001 as the cost of acquisition instead of the original cost. To establish this FMV, you would typically need a valuation report from a registered valuer, based on comparable property values/circle rates as of that date. Without either the original cost records or a credible FMV valuation, the tax department may dispute the cost of acquisition claimed, so obtaining a registered valuer's report is strongly advisable for very old inherited properties.
If I inherited a property in 2023, is my holding period for capital gains purposes counted from 2023 or from when my parent originally bought it? ▼
For inherited (and certain other modes of acquisition like gift or will), the holding period for determining whether a gain is short-term or long-term INCLUDES the period the property was held by the previous owner(s), tracing back to when it was originally acquired (by purchase, construction, etc.) — not just from the date you inherited it. So if your parent bought the property well over 24 months before your sale (the threshold for immovable property), your gain would be a long-term capital gain, even if you inherited it only recently.