Claim audit · FY 2026-27

“Property received from parents on inheritance is completely tax-free, and when I sell it there is almost no tax because I got it free.”

The viral half-truth: 'Inherited property is tax-free, so selling it is also almost tax-free.' The first part is correct — gifts/inheritance from relatives are exempt under section 56(2)(x). The second part is dangerously wrong. Under section 49(1), the cost of acquisition for the heir is the cost at which the previous owner acquired the property, not the fair market value on the date of inheritance. If your father bought land in 1980 for Rs 5 lakh and you inherited it in 2020, your cost of acquisition is Rs 5 lakh (subject to indexation rules). Under section 2(42A), the holding period includes the predecessor's holding period, so inherited property is almost always long-term. For assets acquired on or after 23 July 2024, LTCG under section 112A is taxed at 12.5% with no indexation. For assets acquired before 23 July 2024 — including inherited property whose acquisition date is the original owner's date — the Finance (No. 2) Act 2024 allows the taxpayer to elect 20% with indexation using the cost inflation index. Worked example: inherited house bought in 1980 for Rs 5 lakh, sold in 2025 for Rs 2 crore. Indexed cost using CII escalation from 1980-81 to 2025-26 roughly multiplies the Rs 5 lakh by about 30-40 times, giving an indexed cost near Rs 1.5-2 crore; the 20% indexed route could produce a small gain, while the 12.5% route on Rs 2 crore less Rs 5 lakh produces roughly Rs 24.4 lakh of tax. The department allows you to pick the lower of the two routes, but the key trap remains: because the cost basis is the original purchase price, the entire appreciation over 40-50 years is exposed to capital gains tax unless you reinvest under sections 54/54F (buying another house) or 54EC (bonds up to Rs 50 lakh).