Anita inherited her father's flat — what does she actually owe?

Step 1 — the inheritance is tax-free

This is the part most people anchor on, and they're right. Section 56(2)(x) of the Income Tax Act says: any sum / property received from a "relative" is not "income from other sources" — i.e., not taxable. The definition of relative includes parents, siblings, spouse, lineal ascendants and descendants of self and spouse.

So when the flat transfers to Anita on her father's death: no tax payable. She files her ITR as usual; she doesn't report the flat as income.

What she does have to do:

• Mutate the title at the BMC (Brihanmumbai Municipal Corporation) records — using the will / succession certificate.
• Update the society share certificate (cooperative society transfer).
• Update the property at her own income tax e-filing — under "Capital Assets" if she chooses to disclose voluntarily (it's not mandatory until sale).
• If the flat is let out, the rental income is now hers — taxable as "Income from House Property" from the date of inheritance onwards.

Step 2 — when she sells, the cost basis comes from her father

Section 49(1): the cost of acquisition of an asset received by way of gift, will, or inheritance shall be the cost to the previous owner. So Anita's "cost" for the flat is what her father paid in 1995: ₹6,00,000.

Plus — and this is the kicker — Section 2(42A): the period of holding includes the period held by the previous owner. So Anita's holding period is computed from 1995, not from her father's death in 2025. The flat is LTCG-eligible from day one of her ownership (because father held it for 30 years).

Step 3 — for old properties, use the FMV-on-1-April-2001 substitute

This is the most important provision and the one most people miss. Section 55(2)(b) read with the relevant proviso allows the assessee to choose, for property acquired before 1 April 2001, either:

• The actual cost (here: ₹6L in 1995), or
• The Fair Market Value of the property as on 1 April 2001.

For a 1995 Andheri 2BHK, FMV as on 1 April 2001 was almost certainly significantly higher than the original ₹6L cost. A government-registered valuer (Sec 35A or panel) can certify the FMV. Plausible FMV for our example: ₹15,00,000.

For old properties, this substitution is hugely beneficial. It also restarts the indexation base — instead of indexing from 1995, you index from FY 2001-02 (CII = 100, base year). Use a registered valuer's certificate; do not eyeball it for ITR.

Step 4 — Anita's actual capital-gain math

Sale date: June 2026 (FY 25-26). Sale price: ₹3,50,00,000.

Cost basis: FMV as on 1 April 2001 = ₹15,00,000 (per valuer's certificate).

Holding period: from 1995 — clearly LTCG.

Anita gets the choice between two methods (because the property was acquired by the previous owner before 23 July 2024):

Without any reinvestment exemption, Anita's tax bill is ₹43.55 lakh. The broker was wrong (₹0). The cousin was probably high (₹70L). The lawyer was in the ballpark, but the post-23-Jul-24 12.5% rate beats indexation in this case.

This is the kind of choice that the new Capital Gains calculator under the "Advanced options" toggle will run for you — you enter both costs and CIIs and see both numbers side-by-side. Find it on the calculators page.

Step 5 — Sec 54 reinvestment exemption

Anita plans to buy a ₹2.8 crore flat in Powai. Section 54 exempts LTCG from sale of a residential house if reinvested in another residential house, subject to conditions:

• Reinvest the capital gain (not the sale proceeds) in one residential house in India.
• Within 1 year before sale, or 2 years after sale (purchase), or 3 years for construction.
• If amount not invested before due date of ITR, park it in a Capital Gains Account Scheme (CGAS) with a bank — withdrawable for the new purchase.
• The new house must not be sold within 3 years (else exemption reversed).
• ₹10 crore cap on exemption from FY 23-24 onwards (Finance Act 2023). Anita's gain of ₹3.35cr is well below this.

Anita's capital gain = ₹3.35 crore. Reinvestment in Powai flat = ₹2.8 crore. Sec 54 exemption: ₹2.8 crore. Taxable LTCG = ₹55 lakh. Tax @ 12.5% + cess = ₹7.15 lakh.

If she also parks the remaining ₹55L of gain in NHAI / REC bonds under Sec 54EC within 6 months of sale (subject to ₹50L cap), she shelters another ₹50L. Residual taxable: ₹5L → tax ~₹65k. Effective tax bill down from ₹43.5L to ~₹65k.

Step 6 — TDS by buyer at sale (Sec 194-IA)

When Anita sells for ₹3.5cr, the buyer is required to deduct 1% TDS at source under Section 194-IA (because consideration ≥ ₹50L). The buyer files Form 26QB and issues Form 16B to Anita. TDS = ₹3,50,000.

This TDS is creditable against Anita's total tax liability for the year. If her actual tax (after Sec 54/54EC) is much lower than the TDS, the difference becomes refundable. She can also apply for a lower-deduction certificate under Sec 197 before the sale, showing the AO that her actual tax will be lower and asking for TDS at 0.1% or similar. Takes 2-4 weeks; worth it for large transactions.

Common mistakes — and how to avoid them

• "Inheritance, so no tax ever" — true at inheritance, false at sale. The capital gain is taxable when you sell.
• Using ₹6L cost instead of FMV-on-1-Apr-2001 — leaves money on the table for pre-2001 properties. Always get a registered valuer's certificate.
• Forgetting to compare 20%-indexed vs 12.5%-non-indexed — Finance Act 2024 grandfathered the choice, but only for property acquired before 23 July 2024. Compute both, pick the lower.
• Missing the CGAS deposit deadline — if reinvestment doesn't happen before ITR due date, the un-utilised LTCG must be in a CGAS account by then. Else Sec 54 exemption is lost.
• No valuation report for FMV-on-1-Apr-2001 or improvement costs — these can be challenged by AO. Get a Sec 35A registered valuer or panel valuer to issue a formal certificate.

The funny historical wrinkle

India does not have an inheritance tax (also called "estate duty"). It briefly did — the Estate Duty Act 1953 — but was abolished in 1985 because compliance cost exceeded collection. Since then, India has been one of the rare large economies with no estate or inheritance tax. The political question of reintroducing it surfaces every few years; as of FY 25-26, it has not been reintroduced.

This is why Indian property held for 30+ years generates such large capital gains at sale — the entire accretion is taxed in one go, instead of being smoothed across generations as in countries with estate duty. The Section 49(1) "previous owner cost" rule and FMV-on-1-Apr-2001 are the partial compensations for this design.

Quick answers

For all assets, not just property

Capital gains explained — full rate matrix

When you might want help

Three situations: (1) Sale is planned within 12 months — we'll get valuation report, compute the 20% vs 12.5% comparison, plan Sec 54/54EC reinvestment timing. (2) You've sold and the financial year is closing — we'll structure CGAS deposit and ITR-2 disclosure. (3) Lower-deduction certificate under Sec 197 — to reduce 1% TDS withholding on the sale.

"Anita" and the numbers shown are composite illustrations. Your specific tax will depend on actual cost / FMV / indexation choice / reinvestment.