Capital Gains Tax on Inherited Property: Cost, Holding Period and Exemptions When You Sell
You pay no tax when you inherit a flat or plot. Tax arises only when you sell it, and then you step into the previous owner's shoes: their purchase cost becomes your cost, and their years of ownership count towards yours. Held over 24 months in total, the gain is long-term: 12.5%, or 20% with indexation for property acquired before 23 July 2024.
Key takeaways
- Receiving property by will or inheritance is not taxed. The sale is the only taxable event.
- Your cost is what the previous owner paid, plus their improvements and yours, under section 73 of the Income-tax Act, 2025 (old section 49(1)).
- For property bought before 1 April 2001, you can use its fair market value on that date as the cost, capped at the stamp duty value on that date.
- Residents can still choose 20% with indexation for property acquired before 23 July 2024, indexed from the previous owner's year.
- Each co-heir is taxed on their own share and can claim their own reinvestment exemption.
Why inheriting is not taxed, and where the law now sits
Two provisions keep an inheritance out of tax: passing an asset under a will is not a "transfer", and property received by will or inheritance is excluded from the rule that taxes property received free. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026; the logic survived, the section numbers changed.
| What it covers | Income-tax Act, 2025 | Old 1961 Act |
|---|---|---|
| Transfer under a will or gift is not a transfer | Section 70(1)(b) | Section 47(iii) |
| Property received free, and the inheritance exclusion | Section 92 | Section 56(2)(x) |
| Short-term capital asset (24 months for property) | Section 2(101) | Section 2(42A) |
| Cost = previous owner's cost | Section 73 | Section 49(1) |
| Cost of acquisition, 1 April 2001 value, improvement | Section 90 | Section 55 |
| Stamp duty value as sale price, 110% safe harbour | Section 78 | Section 50C |
| Reinvest in a house | Section 82 | Section 54 |
| Capital gain bonds | Section 85 | Section 54EC |
| Reinvest a plot's sale price in a house | Section 86 | Section 54F |
| Tax rate on long-term gains | Section 197 | Section 112 |
Your cost is the previous owner's cost
Section 73 deems the cost of an inherited asset to be the cost to the "previous owner": the last person who bought or built it rather than received it by gift, will, inheritance or partition. If your grandfather bought a house that passed to your father and then to you, the cost is what your grandfather paid.
Add any capital spent on additions or alterations by the original buyer, anyone in between, or you: a floor added, a boundary wall. Repairs and painting don't count, and for property acquired before 1 April 2001 only improvement spent after that date counts. Keep the bills.
The 1 April 2001 fair value option
For anything acquired before 1 April 2001, section 90 lets you take its fair market value on that date as the cost. For land and buildings, that value can't exceed the stamp duty value (the circle rate) on that date. Get a registered valuer's report that stays within that cap; our note on circle rate vs market rate explains why the two differ.
Holding period: the previous owner's years count
Land or a building is long-term if held for more than 24 months, and for an inherited asset that includes the previous owner's time. A flat your mother bought in 2010 and you inherited in 2025 is long-term if you sell in 2026.
12.5% flat or 20% with indexation
Since 23 July 2024, long-term gains on property are taxed at 12.5% without indexation. For a resident individual or HUF selling land or a building acquired before that date, section 197 caps the tax at what 20% with indexation would give. You compute both and pay the lower.
For inherited property, tax writers generally read "acquired" through the previous owner, so an heir who inherits after July 2024 still gets the choice. Non-resident heirs don't get the 20% option.
Which year's index?
Indexation scales the cost by the cost inflation index (CII) of the sale year over that of the base year. The CII is 100 for 2001-02, 167 for 2010-11 and 384 for 2026-27, the figure the CBDT notified in July 2026. The department has argued for the year the heir inherited. The Bombay High Court in CIT v. Manjula J. Shah held that for an asset received by gift, the index runs from the year the previous owner first held it, and tribunals have since applied the same reasoning to property received under a will. The difference is large, as the second example shows.
Two worked examples
Both assume a resident seller, no surcharge and 4% cess.
A flat bought before 2001
Your father bought a flat in 1995 for Rs 6 lakh. A valuer puts its value on 1 April 2001 at Rs 15 lakh, within that year's stamp duty value. You sell in 2026-27 for Rs 1.2 crore and pay Rs 1.2 lakh brokerage.
| Line | 12.5%, no indexation | 20%, indexed |
|---|---|---|
| Sale price less brokerage | Rs 1,18,80,000 | Rs 1,18,80,000 |
| Cost (2001 value) | Rs 15,00,000 | Rs 57,60,000 (15 lakh x 384/100) |
| Long-term gain | Rs 1,03,80,000 | Rs 61,20,000 |
| Tax with 4% cess | Rs 13,49,400 | Rs 12,72,960 |
Indexation saves Rs 76,440. Using the Rs 6 lakh 1995 price instead of the 2001 value, the 12.5% route would cost Rs 14,66,400.
A flat bought in 2010, inherited in 2022
Your mother bought a flat in 2010-11 for Rs 40 lakh. You inherited it in 2022 and sell it in 2026-27 for Rs 1.1 crore.
- 12.5% route: gain Rs 70 lakh, tax with cess Rs 9,10,000.
- 20% route, indexed from 2010-11: indexed cost Rs 40 lakh x 384/167 = Rs 91,97,605. Gain Rs 18,02,395, tax with cess Rs 3,74,898.
Indexing from the mother's purchase year cuts the bill by more than half, which is why the base year gets litigated.
When several heirs sell together
If three siblings inherit a flat equally, each is taxed on a third of the gain in their own return, picks their own rate route and claims their own exemptions. Under the 20% route in the 2010 example, each sibling's gain is Rs 6,00,798; one can buy a house, another can use bonds, the third can simply pay tax.
The sale deed should name every seller with PAN and share, and state how the price is split. The buyer deducts 1% TDS under section 393(1) (old section 194-IA) where the total consideration is Rs 50 lakh or more, and each seller's credit must match their share. And if one heir gave up their share before the sale, how they did it matters: a relinquishment deed or a partition deed changes who is the seller and in what proportion. Our gift deed vs will guide covers how the property passes in the first place.
Reinvestment exemptions on an inherited property
- Section 82 (old 54): for an inherited house. Buy one residential house in India within one year before or two years after the sale, or build one within three years, and the gain invested is exempt up to Rs 10 crore. With a gain up to Rs 2 crore, you can once buy two houses.
- Section 86 (old 54F): for an inherited plot, shop or land. The full sale proceeds, not just the gain, have to go into a house.
- Section 85 (old 54EC): invest up to Rs 50 lakh of the gain in specified bonds of issuers such as REC, PFC and IRFC within six months. They're locked in for five years and the interest is taxable.
If the house won't be bought before your return is due, park the money in a Capital Gains Account Scheme deposit to keep the exemption alive. The general rules on each relief are in our capital gains tax guide.
Where heirs trip up
- No proof of the original cost. Trace the old deed at the sub-registrar's office, or use the 2001 valuation where it applies. A nil cost means the whole price is taxed.
- Selling below the circle rate. Under section 78, if the stamp duty value is more than 110% of your price, the stamp duty value is treated as the sale price.
- Planning the exemption after the sale. Choose a house, bonds or a deposit before signing; the six-month bond window runs from the transfer.
Frequently asked questions
Do I pay tax when I inherit a house from my parents?
No. Receiving property under a will or by inheritance is not a transfer and is not treated as income, whatever its value. There's no inheritance or estate tax in India today. Income tax arises only when you sell, and then you compute capital gains using your parent's cost and holding period.
What cost do I use if my grandfather bought the land in 1975?
Use its fair market value on 1 April 2001 instead of the 1975 price. The Act allows this for any asset acquired before that date, but for land and buildings the value can't exceed the stamp duty value on 1 April 2001. A registered valuer's report is the usual evidence. That value is then indexed from the 2001-02 index of 100 if you choose the 20% route.
Is the gain short-term if I sell within a year of inheriting?
Usually not. The holding period of an inherited asset includes the time the previous owner held it, so if your parent owned the flat for years, it's already long-term on the day you inherit. The gain is short-term only if the previous owner's period plus yours adds up to 24 months or less, which is rare for family property.
Can I claim the section 82 exemption on an inherited house?
Yes. The exemption applies to a long-term gain on any residential house you sell, however you acquired it. Buy one house within a year before or two years after the sale, or build one within three years, and the gain you invest is exempt up to Rs 10 crore. If you co-own the inherited house with siblings, each of you claims it on your own share.
Does an NRI heir get the 20% indexation choice?
No. The protection in section 197 that lets you pay the lower of 12.5% flat and 20% indexed applies only to resident individuals and HUFs. A non-resident heir pays 12.5% on the unindexed gain, still using the previous owner's cost or the 2001 value. The buyer also deducts tax at source on an NRI's gain.
If you've inherited a property and are weighing a sale, a split among heirs or a reinvestment, Realty Hunting can help you think through the numbers and the timing with your CA.
