Introduction

Inherited property comes with special provisions in the Income Tax Act, especially when calculating capital gains on its sale. If property was received from ancestors and originally acquired before April 1, 2001, income tax law allows the use of either the actual cost of acquisition or the FMV as on April 1, 2001, depending on the details available.

Case 1: When Purchase Details Exist

If the details of when the ancestor purchased the property are available, you can use either the actual purchase price or the FMV as of April 1, 2001, whichever is higher.

Calculation Steps

·         Obtain the original purchase price paid by the ancestor.

·         Determine the FMV as of April 1, 2001 from a registered valuer or state circle rate/ready reckoner, subject to stamp duty valuation limits.

·         Use the higher of the two values as the cost of acquisition for capital gains calculation.

·         Apply indexation (Cost Inflation Index) from 2001 onwards for long-term capital gains.

Example Table

In case FMV exceeds stamp duty value, stamp duty value will be used for indexation.

Indexed Cost Formula  :

Indexed Cost of Acquisition=(FMV or Original Cost × CII in Sale Year)  / CII for 2001-02

*CII for each FY year is provided at end for reference

Case 2: When Purchase Details Do Not Exist

If no records of purchase exist (often the case with very old ancestral property), only FMV as on April 1, 2001 can be used as the cost of acquisition.

Calculation Steps

·         Obtain FMV as on April 1, 2001 via a registered valuer’s report.

·         Alternatively, use state government circle rate/ready reckoner as base value (must not exceed stamp duty value).

·         This FMV is then indexed to the sale year using the Cost Inflation Index (CII)

·         FMV is deemed to be cost of acquisition, regardless of whether the property was bought decades ago or inherited across generations.

Example Table

Professional Valuation

·         Tax authorities generally require a valuer’s report for FMV as on April 1, 2001

·         Keep the valuer’s certificate for future scrutiny, especially in case of audit or clarification.

Important Points

·         No income tax is payable at the time of inheritance; capital gains tax applies only on sale^.

·         Holding period is clubbed: Time held by previous owner (ancestor) is included for determining LTCG.

·         Long-term capital gain (LTCG) on immovable property is taxed at 20% after indexation.

·         FMV must not exceed the stamp duty value as per law.

·         Valuation Report: Engage a government-registered valuer if no records exist.

Here is Cost Inflation Index Table from FY 2001-02 to FY 2025-26:

Conclusion

For ancestral property acquired before April 1, 2001, the cost of acquisition for capital gains can be taken as either the actual purchase price or the FMV on April 1, 2001 (with supporting documents), whichever benefits the taxpayer. In the absence of records, a professional valuation is essential and forms the legal basis for tax computation. These rules are designed to ensure fairness and clarity both for taxpayers and the authorities.