What cost you deduct when you eventually sell an inherited Indian asset

The instinct after inheriting something is to treat its cost as nil, because you never paid for it. The law does the opposite. Under Section 49(1), when you acquire an asset by inheritance or under a will, you step into the previous owner's shoes — their cost of acquisition becomes your cost, and any improvement they made carries over too. So if your father bought a flat for a certain sum, that sum is your cost when you later sell it, even though it passed to you for nothing.

The holding period works the same way. The period your parent held the asset is added to the period you held it, so an asset that was in the family for years is treated as long-term in your hands almost regardless of how long you personally owned it before selling. That matters, because long-term and short-term gains are taxed under different rules.

The practical consequence is that the cost history is precious. The original purchase deed, the price paid, the dates, any major improvement — these are the figures that shrink the taxable gain. Families that kept them are in a far stronger position than those reconstructing them after a sale, which is why the estate-mapping stage tries to capture them early.

Many inherited assets — especially family land and old flats — were acquired by the original owner long ago, sometimes for amounts that look tiny today. For these, the law offers a fairer alternative. Where the asset was acquired before 1 April 2001, you may choose to treat its fair-market value as on 1 April 2001 as the cost instead of the actual (often very low) original price (Section 55(2)(b)). You take whichever is more beneficial.

There is one important guardrail for land or building. The 2001 fair-market value you substitute cannot exceed the stamp-duty value of that property as on 1 April 2001. So you can't simply commission an optimistic valuation — the substituted figure is the lower of a defensible fair-market valuation and the 2001 stamp-duty value. In practice you need both numbers, and the lower one stands.

For an asset your parent bought in, say, the 1980s, the 2001 fair-market value is usually far higher than the original price, so substituting it can materially reduce the taxable gain — which is exactly why the 2001 valuation is worth getting properly, with the stamp-duty cap respected.

Once the cost is settled, the gain is the sale price (less selling costs) minus that cost, and the rate depends on the asset and how long it counts as held — with the previous owner's holding period included, inherited assets are usually long-term.

For an NRI selling land or building, there is a specific current rule that overrides older habits. For any sale on or after 23 July 2024, long-term capital gains on land or building are taxed at a flat 12.5% with no indexation (Section 112). The old 20%-with-indexation route — and the choice between the two that resident individuals got for property bought before that date — does not apply to NRIs; an NRI is on the flat 12.5%, no-indexation basis. So for property, indexation no longer reduces the gain, which makes the 2001 fair-market-value substitution (where the asset qualifies) more valuable, not less, because that is now the main lever left on the cost side.

The buyer is also required to deduct tax at source on an NRI's property sale, and that TDS is computed on the gain at this rate (plus surcharge and cess). Getting the cost basis right before the sale — not after — is what stops tax being deducted on an overstated gain and then having to be reclaimed. Where excess has been deducted, a lower-deduction certificate (Form 13) is the route to fixing it up front, covered on the property-sale pages.

Vikram, an NRI in the UK, inherited a flat in Pune that his father had bought in 1985 for a small sum. His father held it until he died in 2026, and Vikram now wants to sell. His first instinct was that the whole sale price would be taxed, since he paid nothing for it.

That isn't how it works. Because his father acquired the flat before 1 April 2001, Vikram can substitute the flat's fair-market value as on 1 April 2001 for the negligible 1985 price — capped at the flat's stamp-duty value on that date. With a defensible 2001 valuation and the 2001 stamp-duty value both on hand, the lower of the two becomes his cost, far higher than the original price and so a much smaller taxable gain. The holding period includes his father's decades of ownership, so the gain is long-term. Because the sale is after 23 July 2024 and Vikram is an NRI, the long-term gain is taxed at a flat 12.5% with no indexation — the resident's 20%-with-indexation option isn't open to him. The buyer must deduct TDS on that gain, so the CA computes the figure correctly before the sale and, where the deduction would otherwise overshoot, helps Vikram apply for a lower-deduction certificate so cash isn't locked up waiting for a refund.

One thing surprises people more than any other. You can inherit a flat or a parcel of shares and sell them a week later, and the gain is still treated as long-term — because the clock didn't start when you inherited. Under Section 2(42A), the period the previous owner held the asset is added to your own holding period. Your parent's twenty years of ownership count as yours.

That single rule is why almost no inherited sale is short-term. The asset only counts as short-term if the deceased's holding plus yours together falls under the threshold — and for property that threshold is more than 24 months, for listed shares and equity funds more than 12 months. A flat that has been in the family for decades clears that with room to spare, no matter how briefly you personally held it.

It matters because the rate turns on it. A long-term gain on inherited property is taxed at the flat 12.5% (covered above); a short-term gain would instead be added to your other Indian income and taxed at slab rates, which for a sizeable gain is usually worse. So in practice, the carried-over holding period is working in your favour — it pushes the sale into the long-term bracket you want, even on a quick sale after a death.

The 2001 fair-market-value substitution is the single biggest lever on an old family asset (Section 55(2)(b)) — but only if the figure stands up. A number jotted on the back of an envelope, or an estate agent's cheerful estimate, is exactly what an assessing officer disallows, leaving you back on the tiny original cost. So the 2001 value is worth getting properly.

In practice that means a valuation report from a registered valuer, dated as on 1 April 2001, supported by comparable transactions or the circle/ready-reckoner rates of that area for that year. For land or building you also need the property's stamp-duty value as on 1 April 2001, because the law caps the substituted figure at that value — so the cost you finally use is the lower of the valuer's figure and the 2001 stamp-duty value.

Get both numbers before you sell, not after the buyer has already deducted tax. Reconstructing a 2001 valuation years after the sale, when the gain is already under question, is far harder than commissioning it cleanly up front — and the difference in tax on a decades-old property is rarely small.

When the rules changed on 23 July 2024, the government softened the blow for one group. A resident individual or a resident HUF selling land or building they acquired before that date can compute the tax both ways — the new 12.5% without indexation, and the old 20% with indexation — and pay whichever is lower. That escape hatch is the "grandfathering" choice you may have read about.

The catch for our readers: that choice is written for residents only. An NRI selling inherited property does not get to pick the 20%-with-indexation route — the flat 12.5% without indexation is the one and only basis (Section 112). We've web-checked this carefully because it is easy to read an article aimed at residents and assume it applies to you; it does not.

The practical takeaway is not gloomy, though. Since indexation is off the table for you anyway, the lever that does work is the cost side — and for a pre-2001 asset that means the 1-April-2001 value substitution above. That is where an NRI's tax on an old inherited property is actually brought down, not through an indexation choice you can't access.

Two things bite NRIs specifically when the inherited asset is finally sold, and both are about cash, not just tax.

First, the TDS trap. When an NRI sells Indian property, the buyer must deduct tax at source (Section 195). In principle the tax falls only on your gain — but a buyer rarely knows your cost or your 2001 value, so to stay safe they deduct on the whole sale price, not the gain. On a long-term sale that is 12.5% (plus surcharge and cess) of the entire consideration, which can lock up many times the tax you actually owe. The clean fix is a lower-deduction certificate (Form 13, under Section 197), applied for before the deed is signed: it tells the buyer to deduct only on the correctly computed gain, so you keep your money at closing instead of waiting a year to reclaim it. The detail of that route is on the excess-TDS / Form 13 page.

Second, getting the proceeds abroad. Inherited-property sale money sits in your NRO account, and an NRI can repatriate up to USD 1 million per financial year out of NRO without RBI approval — a limit that pools all your NRO outward remittances for the year, not just this sale. Above ₹5 lakh, the bank needs a chartered accountant's Form 15CB plus your Form 15CA declaration confirming the funds are tax-clean. So the sale, the TDS and the repatriation are one connected chain: compute the gain right, hold the TDS down with Form 13, then move the proceeds out under the USD 1 million route. The repatriation step itself is covered on the inheritance-repatriation page below.