COURTKUTCHEHRY SPECIAL ON CAPITAL GAIN LAWS ON INHERITED PROPERTY
Capital Gains Tax on Inherited Property: What Families Must Know Before Selling Homes in India
No Inheritance Tax, But Sale Attracts Capital Gains Liability
Supreme Court and Tax Experts Clarify Rules for Shared Proceeds
By Our Legal Reporter
New Delhi: January 09, 2026:
Inheritance is a sensitive subject in India, often tied to family emotions and ancestral wealth. While India does not impose a direct inheritance tax, selling an inherited property triggers capital gains tax. This article explains how the law applies, what families should prepare for, and how proceeds are shared among heirs.
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What Is Inherited Property?
- Inherited property refers to assets passed down after the death of the original owner.
- It can include houses, land, gold, shares, deposits, or other movable assets.
- In India, inheritance itself is not taxable. The tax liability arises only when the property is sold.
Capital Gains Tax Basics
- Capital gains tax is levied when a property is sold for profit.
- For inherited property, the cost of acquisition is considered the price paid by the original owner, not the heir.
- If the property was purchased decades ago, heirs benefit from indexation, which adjusts the cost for inflation.
- The gains are classified as:
- Short-term capital gains (STCG): If the property is sold within 24 months of inheritance.
- Long-term capital gains (LTCG): If sold after 24 months, taxed at 20% with indexation.
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How Proceeds Are Shared Among Heirs
- When multiple heirs inherit a property, the sale proceeds are divided proportionately.
- Each heir is taxed individually on their share of capital gains.
- Example: If three siblings inherit a house and sell it for ₹3 crore, each receives ₹1 crore. Each sibling must calculate capital gains tax separately.
Supreme Court’s Clarification
- The Supreme Court has emphasized that consensual division of proceeds is valid.
- Disputes often arise when one heir refuses to sell. In such cases, courts may order partition or auction.
- The ruling ensures that tax liability is not avoided simply because property is jointly owned.
Exemptions Available
Heirs can reduce tax liability using exemptions under the Income Tax Act:
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- Section 54: Exemption if sale proceeds are reinvested in another residential property within 2 years.
- Section 54EC: Exemption if gains are invested in specified bonds (NHAI, REC) within 6 months.
- Section 54F: Applies if proceeds are invested in a new house, provided the heir does not own more than one property.
Special Considerations for NRIs
- Non-Resident Indians (NRIs) inheriting property in India face additional compliance:
- Tax deducted at source (TDS) applies when property is sold.
- NRIs must file returns in India to claim refunds or exemptions.
- Double taxation treaties may help reduce liability.
Practical Challenges Families Face
- Emotional attachment: Many families hesitate to sell ancestral homes.
- Legal disputes: Without a clear will, disagreements among heirs can delay sales.
- Documentation: Mutation of property records and legal heir certificates are mandatory before sale.
- Valuation issues: Determining fair market value can be contentious.
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Expert Opinions
- Tax experts advise heirs to plan sales strategically, reinvesting proceeds to minimize tax.
- Chartered accountants recommend keeping records of the original purchase price and improvements made to the property.
- Legal experts stress the importance of registered wills to avoid disputes.
Conclusion
Selling inherited property in India is not just a financial transaction—it is a blend of law, taxation, and family dynamics. While inheritance itself is tax-free, capital gains tax applies on sale, and heirs must divide liability proportionately. With proper planning, exemptions, and legal clarity, families can preserve wealth while complying with tax laws.
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