Selling a house you inherited: how the gain is actually computed

Two siblings inherit their parents’ house in Tripunithura. Their father bought the land in 1974 and built on it over the following decade. Now, a year after his death, they have a buyer. One sibling assumes the entire sale price is taxable profit — the 1974 price was almost nothing, so what cost is there to deduct? The other assumes there is no tax at all, because “we didn’t buy it, we inherited it.”

Both are wrong, in opposite directions. The actual computation sits between them, and it rewards anyone who works through it before signing anything.

Inheritance itself is not the taxable event

Receiving property by inheritance or under a will is not a transfer that attracts capital gains tax. No tax fell due when the siblings’ names entered the record. The taxable event is the sale. Capital gains are charged under s.67 of the Income-tax Act, 2025 (erstwhile s.45), and everything below is about computing that gain correctly.

Your cost and your clock come from the previous owner

The law does not treat inherited property as acquired for nothing. Under s.73 of the 2025 Act (erstwhile s.49), where property comes to you by succession or inheritance, your cost of acquisition is the cost to the previous owner — and where the previous owner also acquired it by inheritance, you walk the chain back to the last owner who actually paid for it.

The holding period travels the same way. The period the previous owner held the property counts as yours. The siblings did not acquire the house last year; for capital-gains purposes their ownership reaches back to 1974. Property held beyond the statutory holding period for immovable property produces a long-term gain, taxed at the rate in force under s.197 of the Income-tax Act, 2025 (erstwhile s.112). For any property inherited from a parent who held it for decades, the gain will be long-term. That matters, because only long-term gains qualify for the exemptions discussed below.

The 2001 option — usually the single biggest number in the computation

For property acquired (by the previous owner) before 1 April 2001, s.90(2)(a) of the 2025 Act (erstwhile s.55) gives you a choice: take the actual historical cost, or take the fair market value of the property as on 1 April 2001.

For the Tripunithura house, the 1974 cost is trivial. Its market value in April 2001 — after Kochi’s growth through the 1990s — is not. Electing the 2001 value can replace a negligible cost with a substantial one, and the gain shrinks by exactly that difference. This single election is why sellers of old family property routinely discover their taxable gain is a fraction of what they feared.

The value must be defensible. Obtain a registered valuer’s report for the property as it stood on 1 April 2001; the valuer is a professional you appoint, and the report is the document the department will test. Note also that the law caps the 2001 value by reference to the stamp-duty value of that date — the valuer will work within that.

Two cautions. First, older guides describe indexing the cost for inflation; the law changed in 2024, and for most sales the computation is now the plain difference, with a limited transitional relief available to resident sellers of property acquired before the change — check the current position rather than an old article. Second, the sale consideration itself is tested against the stamp-duty value of the property under the anti-understatement rule at s.78 (erstwhile s.50C); pricing far below the registration value creates tax on money you never received.

This single election is why sellers of old family property routinely discover their taxable gain is a fraction of what they feared.

Improvements — and the evidence problem

Money spent improving the property adds to cost. But two rules bite. Where you have elected the 2001 value, only improvements after 1 April 2001 count — the earlier construction is subsumed in that value. And every claimed amount needs evidence: contractor bills, bank withdrawals that match, sanctioned plans, property-tax records showing the enlarged building. Family memory of “about what the first floor cost in 2006” is not a number the department accepts. Gather what survives before you compute, not after a notice arrives.

The computation itself

s.72 of the 2025 Act (erstwhile s.48) puts it in one line: full value of consideration, less expenses of transfer (brokerage, legal fees), less cost of acquisition, less cost of improvement. What remains is the long-term capital gain. For old inherited property with the 2001 election properly made, that figure is routinely far smaller than the sale price — and it is the figure on which everything else, including the exemptions, operates.

The exemptions — and why they cannot be discovered at filing

Two main routes can reduce the gain, sometimes to nil.

Another house — s.82 (erstwhile s.54). Reinvest the gain in one residential house in India: purchased within one year before or two years after the sale, or constructed within three years after it. The exemption follows the reinvested gain, subject to the conditions and limits the section prescribes.

Specified bonds — s.85 (erstwhile s.54EC). Invest the gain in the notified bonds within six months of the transfer, up to the statutory ceiling, with a lock-in period. Simpler than buying property, and useful where the gain is moderate.

The deposit mechanism — s.89. The house route allows two or three years; your return of income under s.263 (erstwhile s.139) falls due much sooner. s.89 bridges the gap: deposit the unspent gain in the designated scheme on or before the due date for filing the return, and the deposited amount is treated as applied. Draw on it later for the purchase or construction.

Now the part everyone gets wrong. Every one of these windows is anchored to the date of sale or the return due date — not to the date you sat down with your papers. A seller who first hears of s.85 eight months after the deed has missed it. A seller who spent the proceeds on other things and learns of s.89 after the filing due date has missed that too. The exemption is not a box ticked in the return; it is a set of acts — a purchase, an investment, a deposit — each with a deadline that started running at registration. Plan them before the sale agreement is signed, decide which route fits, and diarise the dates. Discovered at filing, the reliefs are usually already gone.

Where the NRI position differs

The computation above is identical for residents and non-residents. The differences sit around it.

The buyer of an NRI’s property withholds tax under s.393(2), Table Sl. No. 17 of the 2025 Act (erstwhile s.195) on the whole consideration — not the 1% that applies to a resident seller — unless a lower-deduction certificate under s.395(1) (erstwhile s.197 of the 1961 Act) is obtained before the money moves. An NRI planning to claim exemption under s.82 or s.85 should say so in that certificate application: a credible reinvestment plan reduces the estimated tax the officer certifies. The reinvestment itself must still be in India, on the same deadlines. Treaty relief under s.159 (erstwhile s.90) may bear on the final liability, and repatriating the proceeds will require the remittance information return and a certificate signed by a chartered accountant.

The arithmetic, then, is the easy part. Carried-over cost, the 2001 election, documented improvements, one of two exemption routes, the deposit scheme if timing slips. What separates a modest tax bill from a painful one is almost never the law. It is whether the computation was done before the deed — while every option was still open.

This article is general information, not advice on your facts. Rates, limits and time periods in force change with each Finance Act; confirm the current position before acting.