Selling dad’s old house? How you can pay Rs 9.08 lakh instead of Rs 12.25 lakh in capital gains tax

Selling an inherited property can be stressful—but ignorance could cost you lakhs in unnecessary taxes. Chartered Accountant Nitin Kaushik says, “Inherited wealth is common in India, but a little financial literacy can preserve a bigger share of your inheritance.”

Many Indians assume that selling a father’s or grandfather’s property will automatically result in a massive tax bill. That’s a myth. The Income Tax Act provides rules that can significantly reduce your tax liability if you know how to apply them.

Here’s the breakdown:

You don’t pay tax when you inherit property. Tax is triggered only when you sell it, and it is levied on Capital Gains—essentially, the difference between the sale price and the “cost” of the property. But what counts as cost is where most people go wrong.

What counts as cost?

Before you calculate how much tax you owe on a sold inherited property, it’s crucial to understand what counts as the “cost” of the property. The definition of cost determines your capital gains, and knowing the options available under the Income Tax Act can save you lakhs. By carefully considering the purchase price, applicable Fair Market Value, improvements, and related expenses, you can significantly reduce your taxable gains. Additionally, indexation can further enhance your savings by adjusting old costs for inflation. Here’s a detailed breakdown of what qualifies as cost and how it impacts your tax liability:

Original purchase price of the property

Fair Market Value (FMV) as of April 1, 2001, if the property was bought before that date

Costs of improvements or renovations

Brokerage or agent fees at the time of sale

Indexation benefit

For properties acquired before July 23, 2024, resident Indians can apply indexation, which adjusts old costs for inflation. This increases the cost basis, lowers your taxable gain, and reduces your tax liability. Non-resident Indians, however, do not get this benefit.

For Example

Father bought a flat in 1998 for Rs 10 lakh

FMV on April 1, 2001 = Rs 20 lakh

Sold in March 2025 for Rs 1.2 crore

Brokerage: Rs 2 lakh

Without Indexation:

Sale Price Rs 1.2 cr – FMV Rs 20L – Brokerage Rs 2L = Capital Gain Rs 98L LTCG Tax @ 12.5% = Rs 12.25L

With Indexation:

Indexed Cost = Rs 20L × (CII FY25 363 / CII FY02 100) = Rs 72.6L Capital Gain = 1.2 cr – 72.6L – 2L = Rs 45.4L LTCG Tax @ 20% = Rs 9.08L

Savings = Rs 3.17 lakh!

Inheritance tax in India

Inheritance tax, also called death tax, is levied on property and assets (like land, gold, or cash) passed on after someone dies. The tax amount usually depends on the value of the inheritance and the heir’s relationship with the deceased, with close family members often paying less or being exempt.

In India, there is currently no inheritance tax. The Inheritance or Estate Tax was abolished in 1985. Assets transferred through a will or under intestate succession pass directly to legal heirs without any consideration and are not treated as gifts under the Income Tax Act, 1961, meaning they are not taxed at the time of inheritance.

However, income generated from inherited property, such as rent or interest, is taxable in the hands of the heir. If the heir later sells the property, capital gains tax applies, with the holding period of both the deceased and the heir determining whether it is treated as long-term or short-term gains.

Key takeaways for sellers

Always compare FMV (2001) + indexation vs. standard method

Include improvement and brokerage costs

Don’t blindly pay taxes—calculate both options

NRIs miss indexation but can still use FMV to reduce tax

With the right knowledge, selling an inherited property need not be a tax nightmare. A few careful calculations can save lakhs and preserve more of your inheritance.