Capital Gains on Inherited Property: How the Cost Base Is Actually Calculated

If you inherited a flat or plot in India and now want to sell it, the tax is not computed from what it was worth the day you inherited it. It is computed from what the original owner paid, decades ago, and that one rule turns a small-looking sale into a large taxable gain.

This catches most NRI heirs off guard. You think the cost base resets to the value on the date of death. It does not. The law carries forward the previous owner's cost. The gap between that old number and today's price is what you pay tax on. This guide walks the calculation as the Income Tax Act runs it, with the post-July-2024 rates and the one substitution that saves NRIs the most money.

You owe nothing at the moment of inheritance

Inheriting property is not a taxable event in India. There is no inheritance tax and no estate duty. Section 47 of the Income Tax Act keeps a transfer under a will or by succession outside the definition of "transfer," so no capital gains arise when the asset passes to you. Receiving the property also sits outside the gift-tax net under Section 56(2)(x), which excludes property received under a will or by inheritance.

So the day you inherit, you pay zero. The tax bill arrives when you sell. That is where the cost base rule bites.

The cost base is the previous owner's cost, not the value at inheritance

When you sell inherited property, your cost of acquisition is the cost for which the previous owner acquired it. This is Section 49(1) of the Income Tax Act. The market value on the date you inherited it does not enter the calculation.

Read that again. It is the single most expensive misunderstanding NRIs have about Indian property:

This is why a sale that feels like cashing out a recent inheritance produces a gain that spans thirty years of price growth. The bulk of the gain belongs to a period you never owned the asset.

The substitution that limits the damage: FMV as on 1 April 2001

There is one relief, and for old family property it is large. If the previous owner acquired the property before 1 April 2001, you may substitute the Fair Market Value as on 1 April 2001 in place of the original cost. You take the higher of the actual original cost or the 1 April 2001 FMV. One limit applies to land and building: the FMV you adopt cannot exceed the stamp duty value of the asset as on 1 April 2001, where that stamp duty value is available.

For a flat bought in 1995 for 4 lakh, the 2001 value might be 18 lakh. You use 18 lakh as your cost base. That alone cuts the taxable gain by a wide margin. Get a registered valuer's report for the 1 April 2001 value before you file. The Assessing Officer will ask for it. A defensible valuation is the difference between a clean assessment and a dispute.

Property the previous owner acquired on or after 1 April 2001 gets no substitution. You use the actual cost.

The holding period works in your favour

Here the carry-forward rule helps you. For inherited property, the holding period includes the period the previous owner held the asset. You do not start counting from the date of death.

So if your father bought the property in 2003 and you sell in 2026, your holding period is 23 years, not the 2 years since you inherited it. Immovable property held longer than 24 months is a long-term capital asset. Inherited property is therefore long-term in almost every case, which means the lower LTCG rate, not the higher slab-rate short-term treatment. The same Section 49 logic that hurts you on cost helps you on holding period.

The rate: 12.5% without indexation, and the NRI catch

Since 23 July 2024, under the Finance (No. 2) Act 2024, long-term capital gains on property are taxed at 12.5% without indexation. The old 20%-with-indexation regime was replaced.

The Act left one door open. A resident individual or HUF who acquired the land or building before 23 July 2024 may compare the two methods and pay the lower of 12.5% without indexation or 20% with indexation. That grandfathering choice protects long-held resident-owned property from losing the indexation benefit.

That choice does not extend to NRIs. The grandfathering option is written for resident individuals and HUFs. As an NRI seller, you pay the flat 12.5% without indexation, whatever the acquisition date. Plan for 12.5% on the gain. Do not assume you get to run the indexation comparison. We cover the broader NRI position in our guide on capital gains tax on NRI property.

The cash-flow shock most NRIs miss: TDS on the full sale value

The rate is one problem. The withholding is the other. When an NRI sells property, the buyer must deduct TDS at 12.5% (plus surcharge and 4% cess) on the entire sale consideration, not on the gain. On a 2 crore sale that is 25 lakh-plus locked up at the registry, even when your actual tax after the FMV substitution is a fraction of that.

You recover the excess two ways. You file a return and claim the refund, or you get a lower-deduction certificate under Section 197 before the sale closes. The Section 197 certificate is the clean route, and it earns its effort on any sizeable transaction. We set out the mechanics in our guide on TDS on sale of property by an NRI. Once the money clears, repatriating it has its own rules, covered in our guide on repatriating sale proceeds from your NRO account.

Before you sell, get the title and the heirs clean

The tax calculation assumes the property is yours to sell. On paper, often it is not yet. Inherited property usually needs mutation, a succession certificate or legal heir certificate, and the consent of every co-heir. A buyer's lawyer will not clear funds on a half-documented title. Two related guides cover this groundwork: inheriting property in India as an NRI and, when siblings disagree, breaking a co-heir deadlock on inherited property.

FAQ

How is capital gains tax calculated on inherited property in India?

Capital gains equal the sale price minus the previous owner's cost of acquisition (Section 49(1)), plus any improvement costs. You owe nothing at inheritance. On sale, long-term gains are taxed at 12.5% without indexation under the post-23-July-2024 regime. If the original owner bought before 1 April 2001, you may substitute the higher of actual cost or FMV on 1 April 2001 as your cost base, capped at the stamp duty value on that date for land and building.

Is the cost of inherited property the market value at inheritance?

No. Your cost is the price the previous owner paid, not the market value on the date you inherited it. Section 49(1) carries the previous owner's cost forward to you. India gives no step-up to date-of-death value. This is why selling inherited property produces a gain measured across decades of price growth, often far larger than heirs expect.

What is the FMV as on 1 April 2001 for inherited property?

If the previous owner acquired the property before 1 April 2001, you may use the Fair Market Value on that date as your cost base, taking whichever is higher between the actual original cost and the 1 April 2001 FMV. For land and building, the FMV you adopt cannot exceed the stamp duty value as on 1 April 2001 where that value is available. It lowers the taxable gain on old family property. Get a registered valuer's report for the 1 April 2001 value to support the figure on assessment.

Do NRIs pay capital gains on inherited property they did not buy?

Yes. You pay no tax when you inherit, but you pay capital gains tax when you sell, even though you never bought the asset. The gain is computed from the previous owner's cost under Section 49(1). NRIs are taxed at the flat 12.5% LTCG rate without indexation and do not get the resident-only 20%-with-indexation grandfathering option.

How 66 MG Road helps

Selling inherited property from abroad means coordinating a valuer, a tax filing, a lower-deduction certificate, and a buyer's lawyer, across a time zone, without being in the room. We run that for owners who cannot. One vetted manager per property. Dated photo proof of every visit and document collected. Itemized billing with no markup games. Rent and proceeds routed to your NRO account. We operate in Mumbai, Pune, Bangalore, Hyderabad, Chennai, and Gurgaon. See what we do or request a proposal for your specific property. We will not pretend the tax is smaller than it is. We will make sure you do not overpay it or leave a refund stuck with the buyer.

Saurabh Garg, founder, 66 MG Road

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