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 one of life’s more stressful financial decisions. You may feel a mix of nostalgia, obligation, and anxiety about taxes. Many Indians assume that selling a father’s or grandfather’s property automatically results in a massive tax bill. But that’s a myth. With proper planning and knowledge of the Income Tax rules, you can significantly reduce your liability and save lakhs in taxes.

Chartered Accountant Nitin Kaushik explains, “Inherited wealth is common in India, but a little financial literacy can preserve a bigger share of your inheritance.” Let’s break down exactly how you can legally minimize capital gains tax on inherited property.

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1. Understanding Capital Gains on Inherited Property

When you inherit property, you do not pay tax at the time of inheritance. Tax liability arises only when you sell the property. The tax is levied as Capital Gains Tax (CGT)—the difference between the sale price and the “cost” of the property.

Most people go wrong at this stage by incorrectly calculating the cost, which leads to paying unnecessarily high taxes. Let’s understand the concept of cost more clearly.

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2. What Counts as the “Cost” of Inherited Property?

The Income Tax Act defines several components that can be included in the cost of a property. By carefully considering these, you can reduce your taxable gain substantially.

The cost of inherited property may include:

1. Original Purchase Price:
   This is the amount your father or grandfather paid to buy the property.

2. Fair Market Value (FMV) as of April 1, 2001:
   If the property was acquired before April 1, 2001, the law allows you to use its FMV on that date as the cost for calculating capital gains. This is a critical point because properties purchased decades ago often have an FMV far higher than their original purchase price, which can significantly reduce your taxable gain.

3. Costs of Improvements or Renovations:
   Any documented expenses on improving or renovating the property—like adding rooms, flooring, painting, or structural work—can be added to the cost.

4. Brokerage or Agent Fees at the Time of Sale:
   Any commissions or fees paid to real estate agents or brokers when selling the property are deductible from your capital gains.

5. Indexation Benefit:
   For properties acquired before July 23, 2024, resident Indians can apply indexation, which adjusts the property’s cost for inflation. This increases your cost basis, lowers taxable gain, and reduces your capital gains tax. Non-resident Indians (NRIs), however, do not get this benefit.

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3. How Indexation Works

Indexation is a powerful tool that can save you lakhs in taxes. Here’s an example to illustrate:

• 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:

Capital Gain = Sale Price - FMV - Brokerage
             = 1.2 crore - 20 lakh - 2 lakh
             = 98 lakh
LTCG Tax @ 12.5% = Rs 12.25 lakh

With Indexation:

• Indexed Cost = FMV × (CII FY25 / CII FY02)
  = 20 lakh × (363 / 100) = Rs 72.6 lakh

Capital Gain = 1.2 crore - 72.6 lakh - 2 lakh
             = 45.4 lakh
LTCG Tax @ 20% = Rs 9.08 lakh

Savings: Rs 3.17 lakh

This example clearly shows how using indexation can significantly reduce tax liability.

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4. Understanding Inheritance Tax in India

Many people confuse capital gains tax with inheritance tax. Here’s what you need to know:

• Inheritance Tax (or estate/death tax) is levied on property and assets passed on after someone dies.

• In India, inheritance tax no longer exists. It was abolished in 1985.

• Property transferred through a will or intestate succession passes directly to legal heirs without taxation.

However, any income generated from inherited property, such as rent or interest, is taxable in the hands of the heir. If the property is later sold, capital gains tax applies.

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5. Long-Term vs Short-Term Capital Gains

Whether the capital gain is treated as long-term or short-term affects the tax rate.

• Long-Term Capital Gains (LTCG): If the property is held for more than 24 months, gains are long-term. The tax rate is 20% with indexation.

• Short-Term Capital Gains (STCG): If held for less than 24 months, the tax rate is as per your income slab.

For inherited property, the holding period of the original owner is added to yours. So, even if you inherit a property today, you could qualify for long-term gains if the previous owner held it for more than 2 years.

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6. Key Ways to Reduce Tax on Inherited Property

1. Compare FMV (2001) + Indexation vs Standard Method:
   Always calculate both ways before paying taxes. Use the method that results in lower taxable gains.

2. Include Costs of Improvement and Brokerage:
   Add any renovation expenses or agent commissions to reduce your capital gain.

3. Consider Timing:
   Selling in a financial year when your income is lower can reduce the overall tax burden.

4. NRIs Have Different Rules:
   NRIs cannot use indexation but can still use FMV to reduce tax.

5. Keep Documentation:
   Maintain all bills, receipts, and property documents. Tax authorities may ask for proof of purchase, FMV, improvements, and brokerage fees.

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7. Common Mistakes to Avoid

1. Assuming High Tax Automatically:
   Many people panic and pay full tax without exploring deductions.

2. Ignoring FMV Adjustment:
   Using the original purchase price instead of FMV can cost lakhs unnecessarily.

3. Neglecting Indexation:
   Indexation is a legitimate and powerful method to reduce long-term capital gains tax.

4. Overlooking Renovation Costs:
   Minor renovations with proper bills can be added to the cost, reducing taxable gains.

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8. Planning Ahead: How to Preserve Your Inheritance

• Consult a CA: A professional can help you calculate the optimal cost base and choose the right year for selling.

• Document Everything: Bills for renovations, agent fees, and other expenses must be kept.

• Consider Reinvestment Options: Section 54 of the Income Tax Act allows you to save tax by investing in a new residential property within a specified period.

• Be Aware of Tax Updates: Tax laws and indexation rates may change, so staying updated is crucial.

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9. Real-Life Example

Consider Mr. Sharma, who inherited a property in Delhi from his father:

• Original Purchase Price in 1990: Rs 15 lakh

• FMV in 2001: Rs 40 lakh

• Sold in 2025 for: Rs 2 crore

• Brokerage & legal fees: Rs 3 lakh

• Renovation cost: Rs 5 lakh

Step 1: Calculate Indexed Cost

Indexed Cost = FMV × (CII FY25 / CII FY02)
             = 40 lakh × (363 / 100) = 1.452 crore

Step 2: Capital Gains

Capital Gain = Sale Price - Indexed Cost - Brokerage - Renovation
             = 2 crore - 1.452 crore - 3 lakh - 5 lakh
             = 40 lakh

Step 3: Tax

LTCG Tax @ 20% = 8 lakh

Without proper calculations, Mr. Sharma might have thought his tax was 20–25 lakh. Using FMV and indexation saved him more than 10 lakh legally.

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10. Key Takeaways

• Don’t blindly pay taxes—calculate both FMV + indexation and the standard method.

• Include improvement and brokerage costs to reduce capital gains.

• Understand the difference between long-term and short-term gains.

• NRIs have restrictions but can still reduce tax using FMV.

• With proper planning, selling inherited property need not be a tax nightmare. A few careful calculations can preserve lakhs of rupees in inheritance.

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Conclusion

Selling a father’s or grandfather’s property can be financially rewarding, but ignorance could cost you lakhs in unnecessary taxes. By understanding what counts as cost, using FMV and indexation, and including all eligible expenses, you can significantly lower your capital gains tax.

Remember, inherited property is a legacy, not a liability. With a little financial literacy, you can ensure that most of your inheritance remains in your pocket instead of going to taxes.

Financial tip: Always consult a Chartered Accountant before selling inherited property to optimize your tax savings. Even a small difference in calculation can save lakhs.