Tax on inherited property in India: no inheritance tax, but capital gains when you sell

India has no inheritance tax. Estate duty was abolished for deaths on or after 16 March 1985, and receiving money or property under a will or by inheritance is not taxable income: the Income-tax Act, 2025, in force from 1 April 2026, excludes property received "under a will or by way of inheritance" from the tax on gifts in section 92, and section 70 says such a transfer is not a "transfer" for capital gains. Tax arises later: on rent, interest or dividends the asset earns in your hands, and on capital gains when you sell. For the sale, the previous owner's cost (section 73) and, under the Act's period-of-holding rules, the previous owner's holding period generally count.

This guide is part of the estate planning checklist. For lifetime gifts, see gift tax rules. General capital gains rates for shares and funds are explained by the Income Tax Department.

What is and is not taxed

Cost, holding period and indexation

• Cost of acquisition. The cost to the previous owner who actually bought the asset, plus improvements made by them or you (section 73).
• Assets held before 1 April 2001. You can generally take the fair market value as on 1 April 2001 instead of the original cost (for land and buildings, capped at the stamp duty value on that date).
• Holding period. The previous owner's period of holding is added to yours. For land and buildings, more than 24 months in total makes the gain long-term.
• Rate for long-term gains on property. 12.5% without indexation, plus surcharge and cess.
• Grandfathering option. For land or buildings acquired before 23 July 2024, a resident individual or HUF pays the lower of tax at 12.5% without indexation and tax at 20% with indexation (s. 197(3)). When an inherited asset was bought by the previous owner before that date but inherited after it, take advice on which date applies.

Worked example: selling an inherited flat (illustrative)

Neha's father bought a flat in Pune in 2001-02 for ₹20,00,000. He died in 2020, leaving it to her by will. She sells it in October 2026 for ₹1,20,00,000. She is a resident individual.

Option A: 12.5% without indexation

• Gain = ₹1,20,00,000 − ₹20,00,000 = ₹1,00,00,000
• Tax at 12.5% = ₹12,50,000
• Health and education cess at 4% = ₹50,000
• Total ≈ ₹13,00,000 (before any surcharge)

Option B: 20% with indexation (available because both the purchase and the inheritance were before 23 July 2024)

• Cost Inflation Index for 2001-02 = 100. Assume an index of 390 for the year of sale (illustrative; use the figure CBDT notifies for the tax year).
• Indexed cost = ₹20,00,000 × 390 ÷ 100 = ₹78,00,000
• Gain = ₹1,20,00,000 − ₹78,00,000 = ₹42,00,000
• Tax at 20% = ₹8,40,000; cess 4% = ₹33,600
• Total ≈ ₹8,73,600

Option B is lower, so she pays about ₹8.74 lakh unless she claims an exemption. Courts have generally allowed indexation from the year the previous owner first held the asset, which this example assumes.

Reducing the tax. If she buys or builds a residential house within the time limits (one year before or two years after the sale, or three years to construct), she can claim the house-reinvestment exemption (s. 82, old s. 54), subject to its ₹10 crore cap. If she cannot reinvest before her return is due, she can deposit the gain in a Capital Gains Account Scheme account.

TDS when the buyer pays

A buyer of immovable property worth ₹50 lakh or more must deduct TDS (1% for a resident seller) and file the TDS statement. For NRI heirs, the buyer deducts tax at much higher rates on the gain, and the NRI can apply for a lower deduction certificate. Keep the TDS certificate for your return.

Filing the deceased's last return

The legal heir who acts as legal representative registers on the e-filing portal, adds the deceased's PAN, and files the return for the year of death, covering income up to the date of death. Tax due is payable from the estate, but the representative is not personally liable beyond the estate's assets.

Mistakes to avoid

• Not keeping the previous owner's purchase deed, which proves the cost
• Using the date of inheritance as the purchase date and losing the long-term status
• Missing the reinvestment deadlines for the exemption
• Selling property held by an HUF or by several heirs and reporting the whole gain in one person's return; each co-owner reports their share (an HUF reports in its own return)
• Forgetting that inherited shares and fund units also carry the deceased's cost; keep the transmission papers from the demat and fund transmission
• Forgetting the 1 April 2001 fair market value option for older property; get a registered valuer's report

Frequently asked questions

Do I pay tax when I inherit my father's house?

No. Inheritance is not taxable in India. You pay tax only on income from the house or when you sell it.

Can I use my father's purchase price for capital gains?

Yes. The cost to the previous owner is your cost, and his holding period counts towards yours.

Do I have to show inherited property in my income tax return?

If your income exceeds the reporting threshold for the schedule of assets and liabilities, you may need to report it there. The receipt is not income.

Will a new inheritance tax be introduced?

There has been public debate, but no inheritance or estate tax exists under the Income-tax Act, 2025. Any change would need a new law.

Sources

• Income Tax Department — Income-tax Act, 2025 and the Cost Inflation Index
• Income Tax e-Filing portal — registering as a legal representative
• e-Gazette of India — Income-tax Act, 2025 and Finance Acts
• India Code — historical Estate Duty Act, 1953