Inherited Property Taxation: How to Minimize Capital Gains Tax on Sale
Learn how to save on capital gains tax when selling inherited property or land. Understand the tax implications and strategies to reduce your tax liability.
Capital Gains TaxInherited PropertyReal EstateProperty SaleTax SavingsReal EstateAug 31, 2025
For house properties or land that you received before April 1, 2001, the tax law allows you to use the fair market value (FMV) from that date. This can significantly lower the amount of capital gains tax you owe.
How are Gifted Property Sale Transactions Taxed?
Chartered Accountant Suresh Surana explains:
- “When a parent gifts property or land to a son, daughter, son-in-law, or daughter-in-law, the transaction is not subject to tax in the hands of the recipient under Section 56(2)(x), as such transfers fall within the definition of gifts from ‘relatives.’ However, the treatment of income arising from the property varies depending on the recipient.”
- “Where property is gifted to a son or daughter, the rental income accruing thereafter is generally taxable directly in their hands as the legal owners.”
- “On a subsequent sale of the gifted property, the tax liability arises in the hands of the recipient.”
Exception to the Above Taxation Rule
Surana notes that if the property is transferred without adequate consideration to a spouse or to a son’s wife (i.e., daughter-in-law), the clubbing provisions under Section 64(1)(iv) and 64(1)(vi) may apply. In such cases, the transferor continues to be regarded as the deemed owner for income tax purposes. The rental income or capital gain income is assessed in the hands of the transferor rather than the transferee. Such clubbing provisions may also apply in the case of a gift to a minor son or minor daughter under Section 64(1A) where the transfer is for inadequate consideration.
How are Inherited Property Sale Transactions Taxed?
Surana explains that inherited property or land sale transactions are taxed in the hands of the recipient, but you can benefit from the cost of acquisition of the parent who gave you the property. For example, if your parents got a land for Rs 10 lakh in 1990 and you inherited it in 2001 when the land’s price was Rs 40 lakh, your cost of acquisition for income tax purposes will be Rs 10 lakh.
How to Save Capital Gains Tax on Sale of Inherited Property
Surana explains that when a son or daughter inherits property from a parent, both the cost of acquisition and the holding period of the parent are carried forward. According to Section 49(1) of the Income Tax Act, 1961, the cost of acquisition is deemed to be the same as that at which the parent (the previous owner) had acquired the property. If the parents had themselves inherited or received the property by gift, the cost would be traced back to the last previous owner who actually purchased it.
Moreover, the holding period is also carried over, meaning that the resultant capital gains taxation might be long term. Surana explains: “As per Explanation 1(i)(b) to Section 2(42A), the period for which the parent held the property is also included in the holding period of the legal heir.” When such an inherited property is sold, the capital gains taxation is computed using the parent’s original purchase price (with indexation benefit wherever applicable) and by considering the combined holding period of both parent and legal heir.
Calculations
Following the introduction of the differential tax rate regime for capital gains on the sale of immovable property in Budget 2024, Indian resident taxpayers have two options. The tax rate for Indian residents is as follows:
- Property acquired prior to July 23, 2024: 20% with indexation or 12.5% without indexation
- Property acquired after July 23, 2024: 12.5% without indexation
There are two calculations here depending on when the property which you inherited was acquired:
1. Parents acquired the property before April 1, 2001
2. Parents acquired the property after April 1, 2001
Calculation for Property Acquired Before April 1, 2001
Example 1: Parents acquired property back in 1990 for Rs 20 lakh and now the son has inherited it. He sold the property in 2025 for Rs 20 crore. The Fair Market Value (FMV) of the property stands at Rs 40 lakh. The son has the option to either use the original purchase price of Rs 20 lakh or go with the FMV of Rs 40 lakh as on April 1, 2001, as the cost of acquisition.
| Particulars | Option A (Cost = 1990 price Rs 20 lakh) | Option B (Cost = FMV on 1 Apr 2001 = Rs 40 lakh) |
| --- | --- | --- |
| Sale Price (2025) | Rs 20,00,00,000 | Rs 20,00,00,000 |
| Cost of Acquisition | Rs 20,00,000 | Rs 40,00,000 |
| Indexed Cost of Acquisition (CII 376/100) | Rs 75,20,000 (Rs 20,00,000 × 3.76) | Rs 1,50,40,000 (Rs 40,00,000 × 3.76) |
| Long-Term Capital Gain (with indexation) | Rs 19,24,80,000 (Rs 20,00,00,000 – Rs 75,20,000) | Rs 18,49,60,000 (Rs 20,00,00,000 – Rs 1,45,20,000) |
| Tax @ 20% (with indexation) | Rs 3,84,96,000 | Rs 3,69,92,000 |
| Tax without indexation (12.5% without indexation) | Rs 2,47,50,000 (20,00,00,000 – 20,00,000) × 12.5% | Rs 2,45,00,000 (20,00,00,000 – 40,00,000) × 12.5% |
Surana says: “Overall, claiming the FMV benefit as on 1 April 2001 along with the 12.5% option without indexation would have benefited the son in this case.”
Calculation for Property Acquired After April 1, 2001
Example 2: Parents acquired the property after April 1, 2001 for Rs 50 lakh and the son inherited it. He sold the property in 2025 for Rs 1.5 crore. The son has the option to either use indexation with a 20% tax rate or go with a 12.5% tax rate without indexation. In this case, using the indexation option saved him Rs 4,23,653.
| Particulars | Tax With Indexation (in Rs) | Tax Without Indexation (in Rs) |
| --- | --- | --- |
| Full Value of Consideration (Sale Price) 2025 | 1,50,00,000 | 1,50,00,000 |
| Cost of Acquisition (Original) | 50,00,000 | 50,00,000 |
| CII for Year of Acquisition (2010-11) | 167 | Not applicable |
| CII for Year of Sale (2024-25) | 363 | Not applicable |
| Less: Indexed Cost of Acquisition | 1,08,68,263 (50,00,000 363/167) | Not applicable |
| Long-Term Capital Gain (LTCG) | 41,31,736 | 1,00,00,000 |
| Applicable Tax Rate (u/s 112) | 20% | 12.50% |
| Capital Gains Tax Payable | 8,26,347 | 12,50,000 |
| Effective Tax Rate on Sale Price | 5.51% | 8.33% |
Source: Suresh Surana
Frequently Asked Questions
What is the tax treatment for inherited property?
Inherited property is taxed in the hands of the recipient. However, the cost of acquisition and the holding period of the parent are carried forward, which can help reduce the capital gains tax liability.
Can I use the fair market value (FMV) for inherited property acquired before April 1, 2001?
Yes, you can use the FMV as of April 1, 2001, for properties acquired before that date, which can help lower your capital gains tax.
What are the tax rates for long-term capital gains (LTCG) on property sale?
For properties acquired before July 23, 2024, the tax rate is 20% with indexation or 12.5% without indexation. For properties acquired after July 23, 2024, the tax rate is 12.5% without indexation.
How does the clubbing provision apply to gifted property?
If the property is transferred without adequate consideration to a spouse or to a son’s wife, the clubbing provisions under Section 64(1)(iv) and 64(1)(vi) may apply, making the transferor the deemed owner for tax purposes.
What is the benefit of carrying forward the holding period in inherited property?
Carrying forward the holding period of the parent can qualify the property for long-term capital gains (LTCG) tax rates, which are generally lower than short-term capital gains (STCG) rates.
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