Bottom line up front: when you sell a property you inherited, there is no tax on the inheritance itself — the tax hits only when you sell, and it is a capital gains tax computed as if you had owned the property since your parent (or grandparent) first bought it. You step into their shoes for two things: their original cost and their holding period. And if the property was first acquired before 1 April 2001, you get to substitute the fair market value as on 1 April 2001 for the cost — subject to a cap that quietly wipes out a lot of the benefit people expect.
Getting these three numbers right — cost, holding period and the FMV-2001 substitution — is usually the difference between a large tax bill and a modest one. This guide walks through each, with a full worked example, using the law as it stands for FY 2025-26 (AY 2026-27).
First, the good news: inheriting property is not taxable
Under Section 56(2)(x) of the Income-tax Act, money or property received from a relative, or under a will or by way of inheritance, is specifically excluded from tax. So when a house or plot passes to you on the death of a parent, spouse or other relative, you owe nothing at that point — no gift tax, no income tax, nothing. There is no “inheritance tax” or “estate duty” in India today.
The taxable event is deferred to the day you sell. At that point the gain is computed under the head “Capital Gains”, and the whole question becomes: what is your cost, and how long is the asset deemed to have been held?
You inherit the previous owner’s cost — Section 49(1)
Section 49(1) is the cornerstone. When you acquire property by inheritance, gift or will, your “cost of acquisition” is not zero and it is not the value on the date of death. It is the cost for which the previous owner acquired it — plus any cost of improvement incurred by the previous owner or by you.
So if your father bought a plot in 1995 for Rs. 3 lakh, and you inherited it in 2021 and sell it now, your cost of acquisition starts from that Rs. 3 lakh figure (subject to the FMV-2001 option below), not from the market value in 2021. The tax system treats the gain as having accrued across the entire period the family owned the asset.
You also inherit the holding period — Section 2(42A)
Equally important, and often missed: the holding period of the previous owner is added to yours when deciding whether the gain is long-term or short-term. For land and buildings, the asset is long-term if the combined holding period exceeds 24 months.
In practice, this almost always means inherited property is a long-term capital asset, because the parent typically held it for years. That matters because long-term gains on immovable property are taxed at a concessional rate (12.5%, or 20% with indexation under the option explained below), whereas a short-term gain would simply be added to your income and taxed at your slab rate.
The FMV-2001 option — and the stamp-duty cap most people miss
Here is where the biggest saving lies. If the previous owner acquired the property before 1 April 2001, Section 55(2)(b) lets you replace the actual (old, tiny) cost with the fair market value as on 1 April 2001. Because prices in 2001 were far higher than a purchase price from, say, 1980, this substitution dramatically increases your cost base and shrinks the taxable gain.
But the trap — introduced by the Finance Act 2020 with effect from AY 2021-22 — is that for land or a building, the FMV as on 1 April 2001 that you adopt cannot exceed the stamp duty value (circle rate value) of that property as on 1 April 2001. Many taxpayers get an aggressive valuer’s report showing a high 2001 market value, only to find the figure is capped at the far lower 2001 circle-rate value. So your cost of acquisition becomes:
| Situation | Cost of acquisition you may use |
|---|---|
| Previous owner bought on or after 1 April 2001 | Actual cost paid by the previous owner (+ improvements) |
| Previous owner bought before 1 April 2001 | Higher of (a) actual cost to the previous owner, or (b) FMV as on 1 April 2001 — but (b) capped at the stamp duty value as on 1 April 2001 |
Practical tip: obtain a registered valuer’s report and the 1 April 2001 circle-rate/ready-reckoner value for the locality, then adopt the lower of the two as your FMV. Keep both documents — the Assessing Officer will ask for them if the return is picked up.
What tax rate applies when you sell in FY 2025-26
Since inherited property is almost always long-term, Section 112 governs the rate. Following the changes made by the Finance (No.2) Act 2024, for a transfer on or after 23 July 2024 the default long-term rate on land and building is 12.5% without indexation.
However — and this is a valuable relief for inherited property — a resident individual or HUF gets an option where the asset was acquired before 23 July 2024. Because Section 49(1) deems you to have acquired the property when the previous owner did, an inherited property whose previous owner bought it years ago clearly qualifies. You may therefore compute tax both ways and pay the lower of:
| Method | Rate | Indexation |
|---|---|---|
| New method (default) | 12.5% | Not allowed |
| Old method (option for resident individual/HUF) | 20% | Allowed — cost indexed using the Cost Inflation Index |
For indexation under the old method, the relevant CII values are 100 for 2001-02 and 376 for FY 2025-26. You can model both figures quickly with our Capital Gains Tax Calculator before you file.
A full worked example
Suppose your grandfather bought a plot in 1990 for Rs. 2 lakh. Its fair market value on 1 April 2001 is assessed by a valuer at Rs. 12 lakh, but the stamp duty (circle rate) value as on 1 April 2001 is Rs. 9 lakh. You inherited the plot in 2020 and sell it in FY 2025-26 for Rs. 1.5 crore.
Step 1 — Cost of acquisition. Because the previous owner acquired it before 1 April 2001, you may use the higher of the actual cost (Rs. 2 lakh) or the FMV-2001 (Rs. 12 lakh) — but the FMV is capped at the Rs. 9 lakh stamp duty value. So your cost = Rs. 9,00,000.
Step 2 — Holding period. Counting from your grandfather’s 1990 purchase, the asset is comfortably long-term. LTCG applies.
| Computation | New: 12.5% no indexation | Old: 20% with indexation |
|---|---|---|
| Sale consideration | Rs. 1,50,00,000 | Rs. 1,50,00,000 |
| Cost of acquisition | Rs. 9,00,000 | Rs. 9,00,000 |
| Indexed cost (Rs. 9,00,000 × 376 ÷ 100) | Not applicable | Rs. 33,84,000 |
| Long-term capital gain | Rs. 1,41,00,000 | Rs. 1,16,16,000 |
| Tax | Rs. 17,62,500 | Rs. 23,23,200 |
Here the new 12.5%-without-indexation method is cheaper by about Rs. 5.6 lakh, because the property appreciated far faster than inflation. Had the appreciation been modest — say a plot bought in 2005 that only doubled or tripled — the 20%-with-indexation method would often win. This is exactly why the law lets a resident individual compute both and pay the lower amount, and why you should never assume one method is always better. (Add the cess of 4% on top of the tax figures above.)
Reducing the tax further — the reinvestment exemptions
The gain computed above is not the end of the story. A long-term gain on inherited property can still be sheltered:
Under Section 54, if the inherited asset is a residential house, you can reinvest the gain in another residential house (buy within two years or construct within three) and exempt the gain. Under Section 54F, if the inherited asset is a plot or any non-residential asset, reinvesting the net sale consideration in a residential house can exempt the gain, subject to conditions. And under Section 54EC, investing up to Rs. 50 lakh of the gain in NHAI/REC/PFC bonds within six months gives a further exemption. You can size these options with our Capital Gains Exemption Calculator.
Key takeaways
- Inheriting property is not taxable — tax arises only when you sell, under the head Capital Gains.
- Your cost is the previous owner’s cost (Section 49(1)), and their holding period is added to yours (Section 2(42A)), so inherited property is almost always long-term.
- If the previous owner bought before 1 April 2001, you may substitute the FMV as on 1 April 2001 — but for land/building this is capped at the 1 April 2001 stamp duty value. Keep both the valuer’s report and the circle-rate record.
- On sale in FY 2025-26, a resident individual/HUF can pay the lower of 12.5% without indexation or 20% with indexation — always compute both.
- Sections 54, 54F and 54EC can shelter the gain if you reinvest in a house or specified bonds within the time limits.
Frequently Asked Questions
Do I pay any tax at the time I inherit the property?
No. Inheritance and property received under a will are specifically outside the scope of tax under Section 56(2)(x). Tax arises only when you eventually sell the property, and only on the capital gain.
What is my “cost of acquisition” if my father bought the flat in 2010, well after 2001?
Since the previous owner acquired it after 1 April 2001, the FMV-2001 option does not apply. Your cost is the actual price your father paid in 2010, plus any improvement cost. If you use the 20%-with-indexation method, the indexation runs from the year the previous owner acquired the asset — the position upheld in CIT v. Manjula J. Shah.
The valuer says the 2001 market value is Rs. 40 lakh but the circle rate was only Rs. 25 lakh. Which do I use?
For land or a building, you must cap the FMV as on 1 April 2001 at the stamp duty (circle rate) value as on that date. So you would adopt Rs. 25 lakh, not Rs. 40 lakh, following the Finance Act 2020 amendment to Section 55(2)(b).
Is the holding period counted from the date of my parent’s death or from when they bought it?
For deciding long-term versus short-term, you count from the date the previous owner acquired the property. The date of inheritance is not the starting point. This is why inherited property is nearly always long-term.
Which ITR form do I use to report the sale of inherited property?
An individual with capital gains (and no business income) files ITR-2. Report the sale under the Capital Gains schedule, and if you claim Section 54/54F/54EC exemptions, fill in the reinvestment details and, where required, the Capital Gains Account Scheme particulars.
This article is general information for FY 2025-26 (AY 2026-27) and not a substitute for advice on your specific facts. Valuation and documentation of pre-2001 property is fact-sensitive; consult your CA before filing.