Capital Gains on Inherited Property: Tax Rules & Calculation
- Dipali Waghmode
- Oct 25, 2025
- 8 min read
Capital gains tax on inherited property in India arises only when the inherited asset is sold. While inheritance itself is not taxable under the Income Tax Act, 1961, any profit from selling such property is treated as a capital gain. The tax liability depends on the property’s holding period, the original owner’s purchase cost, and the method of calculation—indexed or non-indexed. Understanding these rules helps taxpayers compute accurate capital gains, apply eligible exemptions, and ensure smooth compliance during e-filing.
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What Are the Tax Rules on Capital Gains from Inherited Property
When a property is inherited, the act of inheritance itself is not taxable in India. However, if the legal heir later sells the inherited property, the profit earned from such a sale becomes taxable under the head “Capital Gains.” The tax is calculated on the difference between the sale consideration and the cost of acquisition (adjusted for indexation). The taxation depends on the holding period, which determines whether the gain is short-term or long-term.
Is Inheritance of Property Taxable in India
Inheritance of property from a relative is not taxable as per Indian tax laws. There is no inheritance tax applicable in India. The Income Tax Act exempts inherited assets received through a will or succession. However, any income generated from the inherited property, such as rent or interest, is taxable in the hands of the heir. Moreover, when the inherited asset is sold, the resulting capital gains become taxable.
How to Calculate Capital Gains on Inherited Property
Capital gains on an inherited property are calculated based on the selling price minus the indexed cost of acquisition and improvement. Since the property was inherited, the cost of acquisition is the same as the cost incurred by the previous owner. The period of holding is also counted from the date the original owner acquired the property, not from the date of inheritance. This ensures fair taxation based on long-term ownership.
Determining the Cost of Acquisition and Indexation
The cost of acquisition includes the price paid by the previous owner to purchase the property along with any capital improvements made over time. Indexation helps adjust the cost according to inflation by using the Cost Inflation Index (CII). This significantly reduces the taxable capital gains and, consequently, the tax liability. For example, if a property purchased in 1995 for ₹10 lakh is sold in 2025 for ₹1 crore, the indexed cost might rise to ₹40–45 lakh, thereby reducing taxable gains substantially.
Classification of Short-Term and Long-Term Capital Gains
If the total holding period of the inherited property (from the date the previous owner acquired it) exceeds 24 months, it is treated as a long-term capital asset. The gains arising from such a sale are classified as long-term capital gains (LTCG). If the holding period is less than 24 months, it becomes a short-term capital asset, and the gains are classified as short-term capital gains (STCG). Most inherited properties fall under the LTCG category since they are generally held for longer durations.
Tax Rates on Sale of Inherited Property
Long-term capital gains from the sale of inherited property are taxed at 20% with the benefit of indexation. Short-term capital gains are taxed at the individual’s applicable income tax slab rate. In addition, surcharge and cess may apply depending on the taxpayer’s income level. It’s crucial to calculate gains accurately to avoid underreporting or incorrect tax computation.
Capital Gains Calculation Example for Inherited Property
Suppose a property purchased by your father in 2000 for ₹8 lakh is inherited by you and sold in 2025 for ₹90 lakh. Using the Cost Inflation Index (CII) of 389 for FY 2024–25 and 406 for FY 2025–26, the indexed cost would be approximately ₹33 lakh. Thus, your taxable long-term capital gain would be ₹57 lakh (₹90 lakh – ₹33 lakh). The tax at 20% would amount to ₹11.4 lakh, excluding cess.
How to Save Tax on Capital Gains from Inherited Property
Tax on capital gains from inherited property can be saved by reinvesting the proceeds in specific avenues. Section 54 allows exemption if the capital gains are reinvested in another residential property within two years of sale or used to construct one within three years. Alternatively, investing in Capital Gains Bonds issued by NHAI or REC under Section 54EC within six months of the sale can provide up to ₹50 lakh exemption.
How to Declare Capital Gains from Inherited Property in ITR
Capital gains from inherited property must be reported in the “Capital Gains” schedule of your Income Tax Return (ITR-2). You’ll need details such as sale consideration, indexed cost of acquisition, date of purchase, date of sale, and improvements made. Attach supporting documents like sale deed, purchase deed, and computation sheet. Platforms like TaxBuddy automate this process by guiding users through pre-filled sections and auto-validating capital gain calculations.
Special Cases: Construction or Improvements on Inherited Property
If the inherited property has undergone improvements or renovations, those costs can also be included in the total cost of acquisition. Expenses such as adding rooms, remodeling, or structural upgrades made by the original owner or the heir are eligible. However, routine maintenance or repair costs are not considered improvements for tax deduction purposes. Keeping proper invoices and bills helps substantiate such claims.
Common Mistakes to Avoid While Calculating Capital Gains
Many taxpayers make errors while reporting inherited property sales. Common mistakes include using the market value instead of the original cost of acquisition, ignoring indexation, and misclassifying gains as short-term instead of long-term. Some also forget to include expenses like brokerage or stamp duty while computing gains. Filing through professional tax platforms ensures compliance and accuracy, preventing notice generation.
How TaxBuddy Simplifies Filing for Capital Gains on Inherited Property
TaxBuddy simplifies the process of declaring and filing capital gains by providing an AI-based computation tool that automatically applies indexation, identifies exemptions under Sections 54 and 54EC, and calculates the correct tax liability. Expert-assisted filing ensures all documentation and declarations are accurate, minimizing the risk of errors or scrutiny. This helps taxpayers save time and claim all eligible deductions confidently.
Conclusion
Capital gains taxation on inherited property can be complex, but understanding the provisions related to cost of acquisition, indexation, and available exemptions can help reduce tax liability significantly. Proper planning and timely reinvestment ensure maximum savings while staying compliant with income tax laws. For effortless and error-free filing, it’s best to use a professional platform like TaxBuddy, which streamlines capital gains reporting and ensures seamless compliance for every taxpayer.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Is inheritance of property taxable in India? Inheritance itself is not taxable in India since there is no inheritance or estate tax under the current income tax laws. However, when the inherited property is later sold, the gains from that sale are taxable as capital gains. The taxability arises only at the time of transfer or sale, not at the point of inheritance. The heir becomes liable to pay tax based on the type of capital gain—short-term or long-term—depending on the holding period of the asset.
Q2. How is the holding period for inherited property determined? The holding period for inherited property is calculated from the date the original owner acquired it, not from the date it was inherited. This means that if your parent purchased the property 20 years ago and you inherited it recently, your holding period will still be considered as 20 years. This extended period usually qualifies the asset as a long-term capital asset, which makes you eligible for indexation benefits and lower tax rates.
Q3. Can improvements made by the heir be added to the cost of acquisition? Yes, any improvements or renovations carried out by the heir after inheriting the property can be added to the cost of acquisition while calculating capital gains. Expenses like reconstruction, major repairs, or additions that enhance the property’s value qualify as capital improvements. Proper documentation such as bills, receipts, and contractor invoices must be retained to support these expenses during assessment.
Q4. What is the tax rate for long-term capital gains on inherited property? Long-term capital gains (LTCG) on inherited property are taxed at a rate of 20% with the benefit of indexation. Indexation adjusts the property’s purchase cost for inflation, thereby reducing the taxable gain. If the property was held for more than 24 months from the date of acquisition by the original owner, it qualifies as a long-term capital asset. Surcharge and cess apply in addition to the 20% tax rate.
Q5. How can one save tax on inherited property sale? Tax on inherited property can be reduced by claiming exemptions under the Income Tax Act. Section 54 allows exemption if the capital gains are reinvested in another residential property within two years of sale (or constructed within three years). Alternatively, exemption can be claimed under Section 54EC by investing the gains in specified bonds such as NHAI or REC within six months from the date of sale.
Q6. Which ITR form should be used for reporting inherited property sale? If you have sold inherited property and need to report capital gains, you should use ITR-2. This form is designed for individuals and Hindu Undivided Families (HUFs) having income from multiple sources, including capital gains from property sales. Ensure you disclose all relevant details under the “Capital Gains” schedule and report deductions or exemptions accurately to avoid discrepancies in AIS or Form 26AS.
Q7. Are stamp duty and registration charges considered in cost calculation? Yes, stamp duty and registration fees paid during the original purchase of the property are included in the cost of acquisition. Additionally, any legal expenses incurred for transferring ownership to the heir can also be added to the total cost. These inclusions help reduce the taxable capital gain amount when the property is eventually sold. Proper invoices and government fee receipts are essential to support these claims.
Q8. What if multiple heirs sell the inherited property together? When multiple heirs jointly sell an inherited property, each heir must report their respective share of the capital gains in their individual income tax return. The tax liability is divided in proportion to the ownership share of each heir. For example, if two siblings equally inherit a property, each must declare 50% of the total capital gains in their ITR under the “Income from Capital Gains” head.
Q9. Can agricultural land inherited from parents be taxed? If the inherited land qualifies as rural agricultural land, it is not considered a capital asset and is therefore exempt from capital gains tax. However, if the land is located in an urban area—within specified municipal limits or population thresholds—it will be treated as a capital asset and subject to capital gains tax when sold. The classification depends on location and population data as per the Income Tax Act definitions.
Q10. How to claim Section 54 exemption properly? To claim exemption under Section 54, you must reinvest the capital gains from the sale of the inherited property into a new residential house in India. The purchase should occur within two years of the sale, or construction should be completed within three years. If the gains are not immediately reinvested, you must deposit the amount in a Capital Gains Account Scheme (CGAS) before the ITR due date to remain eligible for exemption.
Q11. What documents are required to calculate capital gains? Key documents include the original purchase deed, inheritance documents (such as a will or legal heir certificate), sale deed, cost of improvement receipts, and payment proofs for expenses like stamp duty and registration. You will also need the property’s fair market value as of April 1, 2001, if the property was acquired before that date. Maintaining a clear paper trail ensures smooth calculation and verification of capital gains during filing.
Q12. How does TaxBuddy help with inherited property taxation? TaxBuddy’s advanced AI system simplifies inherited property taxation by automatically identifying the acquisition date, calculating indexed cost, and applying the right exemption sections. It minimizes human error and ensures accurate reporting of capital gains. Tax experts at TaxBuddy also review each case to ensure compliance with the latest Income Tax Department guidelines. This helps taxpayers save time, avoid notices, and file returns confidently with accurate exemption claims.
