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How to calculate Capital Gains on Sale of Inherited Property

Updated on:  

08 min read

When a property is received on inheritance or as a gift, it is not taxable for the receiver. When the inheritor or the receiver of this gift of property sells it, capital gains on the sale are taxable for the inheritor.

The procedure to calculate the capital gains of inherited property is given below:

Step 1: You must know the cost of acquisition and indexation in order to calculate the capital gains.

Step 2: Cost of the property – The property did not cost anything to the inheritor, but for calculation of capital gain the cost to the previous owner is considered as the cost of acquisition of the property.

Step 3: Indexation of cost – The year of acquisition of the previous owner is considered for the purpose of indexation of the cost of acquisition along with the year of sale of the property.

Step 4: The base year for such calculations has been updated from 1981 to 2001.

Step 5: Calculate the cost of capital gains using the formula,
Cost of acquisition x ( Cost inflation index of the year of sale / Cost inflation index of the year of acquisition )

where, Cost Inflation Index (CII) varies every financial year and a few are tabulated below:

YearCIIYearCII
2001-021002011-12184
2002-031052012-13200
2003-041092013-14220
2004-051132014-15240
2005-061172015-16254
2006-071222016-17264
2007-081292017-18272
2008-091372018-19280
2009-101482019-20289
2010-11 1672020-21301

The Cost Inflation Index (CII) for the financial year 2021-22 is 317.

Step 6: Subtract the cost of capital gain from the selling price of the property to know the net gain of the transaction.

For example – Mr Arora purchased a property on 1 August 2004 for Rs.75 lakh. Neha inherited this property from her father in 2012. However, she decides to sell this house. In May 2014, Neha sold this house for Rs.1.8 crore.

In this case, the cost for calculating Neha’s capital gain shall be Rs.75 lakh and the cost shall be indexed since it’s a long-term capital gain. For the purpose of indexation, the CII for 2004-05 shall be considered.

Therefore, the cost for calculating capital gains for Neha shall be
Rs.75 lakh x CII of 2014-15 / CII of 2004-05
= Rs.75 lakh x 240 / 113
= Rs.1.6 crore.

Therefore, the net gain for Neha is Rs.20 lakh (Rs. 1.8 crore-1.6 crore).
Do note that the date or year of inheritance is of no importance in this calculation.

You can read about how to save capital gains tax here.

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