Why an old, low purchase price hurts you
Capital gain is the sale price minus the cost of acquisition. When the cost is a price your parents paid in 1985, almost the entire sale value becomes taxable gain. A flat bought for two lakh and sold for one crore looks, on that arithmetic, like a ninety-eight-lakh gain.
The law accepts that holding a number from forty years ago against today's market is unfair, so for property acquired before 1 April 2001 it lets you reset the starting point. Instead of the original price, you may use what the property was actually worth on 1 April 2001, its fair-market value on that date, as the cost (Section 55(2)(b)). Because 2001 values are far closer to current prices than a 1985 receipt, the measured gain shrinks, and so does the tax.
What the 2001 value can and cannot be
The 2001 fair-market value is not a number you pick. For land or a building, the value you substitute cannot exceed the stamp-duty value of that property on 1 April 2001. The law caps it there. Within that limit, the figure is supported by a report from a registered valuer, who works out what the property would have fetched on 1 April 2001 from circle rates, comparable sales of the period and the property's own attributes.
If the seller has inherited the property, the date and cost are taken from the person they inherited from (Section 49(1)), so a property your grandfather bought before 2001 still qualifies for the 2001 step-up in your hands. The assessing officer can refer a claimed value to a Valuation Officer if it looks inflated (Section 55A), which is exactly why a defensible valuer's report matters rather than an optimistic guess.
Indexation is gone for NRIs: the step-up is what's left
For a long time, sellers paired the 2001 value with indexation, scaling that cost up by inflation to the year of sale. That changed on 23 July 2024. For land or a building sold on or after that date, the long-term gain is taxed at a flat 12.5% (plus surcharge and cess) with no indexation under Section 112.
Resident individuals and HUFs got a concession: for property acquired before 23 July 2024 they may still choose the old 20%-with-indexation method if it produces a lower tax. That election is resident-only. An NRI does not get it, so for an NRI the real lever on an old property is the 2001 cost substitution itself, using the highest defensible 2001 value reduces the gain at the flat 12.5% rate.
| Seller | Rate on long-term land/building (sold on/after 23 Jul 2024) | Indexation |
|---|---|---|
| NRI | Flat 12.5% + surcharge + cess | Not available |
| Resident (pre-23 Jul 2024 purchase) | 12.5% no-index, or 20% with index, whichever is lower | Available on the 20% option |
A worked example: Anjali's ancestral flat in Pune
Anjali, an NRI in Singapore, sells a Pune flat in 2026 for one crore. Her father bought it in 1988 for ninety thousand rupees and she inherited it, so the original cost carried to her is that ninety thousand (Section 49(1)).
On the original cost, the gain is almost the whole crore. Instead, a registered valuer assesses the flat's fair-market value as on 1 April 2001, within the stamp-duty-value cap for that date, at, say, eighteen lakh. Substituting that 2001 value as the cost, the long-term gain falls to about eighty-two lakh.
At the flat 12.5% NRI rate that gain attracts roughly ten lakh of tax before surcharge and cess, against the far larger figure she would have faced on the ninety-thousand cost. The eighteen-lakh valuation is the load-bearing number, which is why it is set by a valuer and documented, not estimated. From here Anjali can still reduce the tax further by reinvesting the gain under Section 54 or in capital-gains bonds.