Unlocking tax savings: How to navigate Capital Gains Tax on inherited properties

The cost of acquisition for inherited properties is generally the cost at which the previous owner acquired the property. However, if the previous owner purchased it before 1 April 2001, the inheritor can opt to use the fair market value (FMV) of the property as of 1 April 2001 instead.

“This provision, often applicable under Indian tax law (e.g., Section 49 of the Income Tax Act), allows the inheritor to account for appreciation in value up to 2001. By choosing the FMV as of 1 April 2001, which is typically higher than the original cost, the inheritor can reduce the taxable capital gains when selling the property and apply the indexation benefits,” says Manmeet Kaur, Partner at Karanjawala & Co, a litigation firm.

Anjali Verma, a Pune-based doctor, inherited a house from her mother in 2022. The house had been originally purchased in 1985 by her grandfather for ₹5 lakh and had significantly appreciated in value. Under section 49 of the Income Tax Act, Verma opted for the fair market value as on 1 April 2001 which was ₹25 lakh. In 2023 she sold the house for ₹2.50 crore.

After using indexation benefits her indexed cost of acquisition was ₹87 lakh. This meant that her long-term capital gains was ₹1.63 crore. This way, her capital gains tax was much lesser.

What happens when a property is partitioned?

For inherited properties, the cost of acquisition for the beneficiary is the same as that of the previous owner, and the holding period includes the time held by the previous owner.

“Partitioning inherited property among legal heirs is not considered a "transfer" under Section 2(47) of the IT Act and hence does not trigger capital gains tax or reset the holding period. It is merely a reallocation of existing ownership rights, preserving the original holding period for each heir's share,” says Suresh Surana, a Mumbai-based Chartered Accountant.

Tax liabilities after selling an inherited property

When selling an inherited property, two scenarios can apply.

For properties acquired before 23 July 2024

“In case of assessees being resident individuals and Hindu Undivided Families (HUFs), they have the following two options. The assessee can choose any option which will result in lower tax liability,” says Surana.

In one option the LTCG is taxed at 20% after adjusting the cost of acquisition for inflation using the Cost Inflation Index (CII). Indexation adjusts the original cost of acquisition for inflation, reducing the taxable gain. It uses the Cost Inflation Index (CII), published annually by the Income Tax Department.

In the other, the LTCG is taxed at 12.5% without adjusting for cost indexation benefit.

For properties acquired on or after July 23, 2024

The LTCG is taxed at a flat rate of 12.5% without indexation benefits, as the option for indexation does not apply to properties acquired after this date.

Let us take the example of Raj Mehta who inherited a house in 2025. His father had bought the house in 2010 for ₹10 lakh. Mehta sold it in February 2025 for ₹1.2 crore. When calculating LTCG he has two options. With indexation, let us assume that the adjusted cost of acquisition becomes ₹21.86 lakh. This results in a gain of 98.14 lakh. Taxed at 20 per cent, it comes to 19.63 lakh.

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Without indexation, the gain is ₹1.1 crore ( ₹1.2 crore minus ₹10 lakh). So, the tax at 12.5 per cent amounts to ₹13.75 lakh. Raj chooses the lower tax liability of ₹13.75 lakh.

In addition to the base rate, a surcharge (if applicable, capped at 15% for LTCG) and a 4% health and education cess are levied on the tax amount.

Other deductions and exemptions

Several deductions and exemptions can reduce or eliminate LTCG tax liability when selling inherited property. “If you cannot reinvest before filing your tax return, deposit the gains in a Capital Gains Account Scheme (CGAS) account to claim exemptions later, subject to the prescribed time limits,” says Surana.

One can also claim some exemptions. Let us look at them.

Costs incurred during the sale (e.g., brokerage, legal fees) are deductible from the sale price to calculate the net sale proceeds. Further it can also be indexed if opting for a 20% tax rate. Costs of improvement (e.g., renovations) made by you or the previous owner can be claimed. Further it can also be indexed (if opting for 20% with indexation) and deducted.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics