News: Inherited Property: ITAT on Indexation From Original Buy-11-03-2026

The Surat bench of the Income Tax Appellate Tribunal (ITAT) has reaffirmed, in Adil Noshirvan Shethna vs ITO, that long-term capital gains (LTCG) on inherited property must be computed with indexation starting from the year the original owner acquired the asset, not the year the heir received it. Because indexation then covers the whole holding period, the indexed cost rises and taxable gains fall.

The article illustrates this with Arvind Rao, a 52-year-old Bengaluru consultant who inherited a house from his father in 2018. The father had bought it in 1996, and Arvind sold it in 2026 for 1.80 crore. He first assumed indexation would run only from 2018. Relying on recent ITAT rulings, he instead indexed from 1996 and adopted the Fair Market Value as of April 1, 2001, saving nearly Rs 10 lakh in tax.

Property held for more than 24 months attracts LTCG at 12.5% without indexation from July 23, 2024. For properties bought earlier, sellers can pick whichever is lower: 12.5% without indexation or 20% with it.

B. Shravanth Shanker, Managing Partner, B. Shanker Advocates LLP, said the February 2026 ruling adds weight to steadily evolving jurisprudence on the point. Where the asset was acquired before 1 April 2001, taxpayers may substitute the fair market value on that date as the cost of acquisition.

SR Patnaik, Partner (head - taxation), Cyril Amarchand Mangaldas, said the ruling sets no new principle but affirms the settled legal position. Revenue authorities, he noted, generally contend that indexation should start from the year of inheritance.

Shanker said homeowners can realistically expect tax savings of 30% to 37% compared with indexation from the inheritance year. On sales of around one to two crores, that typically means approximately eight to twelve lakhs less tax, with proportionately more on larger deals. He suggested heirs treat inherited property as a core, tax-advantaged asset and not something to liquidate quickly, especially where the original holding exceeds fifteen to twenty years.

Several safeguards can help sellers avoid overpaying. Patnaik said the first is to establish the holding period from the original owner’s acquisition date. Second, the correct cost inflation index figures must be used for the exact financial years, since even a small error in the base year can inflate the liability. Third, deductible items such as stamp duty, registration charges, brokerage, legal fees and genuine capital improvements should be carefully documented.

For property acquired before 2001, a registered valuer’s report supporting the fair market value as on 1 April 2001 is often the single most effective step.

Patnaik also advised reconciling the Annual Information Statement and Form 26AS before filing, so that automated mismatches do not lead to incorrect demands, and using the correct return form, ordinarily ITR-2, with Schedule CG filled in accurately.