The tax side of inheritance in India: What you should know before passing your assets

Every few years, a fresh debate over inheritance tax in India unsettles families who own assets meant for the next generation. Will your children lose a portion of what you leave behind to tax? While inheritance tax is currently not levied in India, the fear of the unknown, namely, the possibility of its reintroduction continues to linger in the minds of the general public.

Will and estate planning in India already sits near the bottom of most people’s financial to-do list, below investments, insurance, and retirement. The tax around it is murkier still, tangled in half-remembered talk of death duties and gifting limits.

Understanding these rules not only enables you to pass on assets such as your home or investment portfolio efficiently, but also helps you prepare your family for the tax implications that may arise when they inherit them.

What counts as an inheritance in India?

An inheritance is the wealth that reaches you after a family member’s demise, whether that is a family flat, a share portfolio, bank balances, gold, or a business stake. It can also move while the owner is alive, through a gift deed, and the law treats that as a gift with separate rules covered further below.

There’s no inheritance tax in India as of now on the assets passed to you through a Will or by succession.

India abolished estate duty, the closest thing it ever had to a death tax, in 1985. The Estate Duty Act of 1953 charged up to 85% on the largest estates, exceeding ₹20 lakh; Yet, it collected barely ₹20 crore in 1984-85, while creating heavy paperwork and endless valuation disputes.

Section 56(2)(x) of the Income Tax Act, which becomes Section 92 under the Income Tax Act 2025 from FY 2026-27 (Tax Year 2026-27), keeps the position intact by expressly excluding anything received through inheritance or a Will from your taxable income.

Section 56(2)(x) or Section 92 talks about inheritances received from any “Relatives” defined under the Income Tax Act.

Why there’s no inheritance tax in India while most rich nations do

India’s position on tax on inherited property looks unusual the moment you glance abroad.

The United Kingdom levies 40% inheritance tax (IHT) on the portion of an estate above a £325,000 (~₹4.14 crore) threshold, Japan’s inheritance tax climbs as high as 55%, France (45%) and South Korea (50%) run their own versions, and several US states levy estate taxes the inheritance tax levied by the US as federal tax. India sits among the few large economies that charge nothing when inheritance changes hands at death.

This absence keeps drawing political attention, and the idea of reinforcing an inheritance tax resurfaced as recently as the 2024 general election. No proposal sits before Parliament today. For anyone with meaningful assets, the recurring debate is a reminder that the current tax-free treatment on inheritance could change, so planning while the rules stay generous makes sense.

Where does your inheritance actually attract tax?

The tax department steps back in when you sell those assets, earn income from them, or move wealth around the family during someone’s lifetime, which is also when doubts about how inheritance tax in India might apply typically arise. Shraddha Nileshwar, Head of Will & Estate Planning at 1 Finance, breaks down the situations below.

1. Selling an inherited asset attracts capital gains tax.

Inheriting a flat or shares doesn’t cost you anything in tax. It’s only when you sell them later that the capital gains tax comes into the picture. The purchase price and the holding period both carry over from the person you inherited from. So the tax department treats you as if you’d owned the asset from the day they first bought it, not from the day it came to you.

For property, once this combined holding period crosses 24 months, it counts as long term. So if you sell a flat a year after inheriting it, and your father had already held it for three years before that, the total comes to four years, which puts the sale in the long term bracket.

Long-term capital gains (LTCG) on property attract 12.5% without indexation, a rule in force since July 23rd, 2024. For property the previous owner bought before that date, resident individuals and Hindu Undivided Families (HUFs) can select either of the routes, filing under the one that results in the lower tax bill.

• Route 1: Follow the same 12.5% LTCG without indexation benefit.
• Route 2: 20% tax with the benefit of indexation after inflating the purchase cost through the Cost Inflation Index (CII).

Take a flat your father bought in 2005 for ₹40 lakh, which you inherit and sell for ₹1 crore. Under the 12.5% without indexation rule, the taxable gain is ₹60 lakh, so the tax comes to ₹7.5 lakh before cess.

Under the indexation method, the original purchase price is adjusted for inflation using the government-notified cost inflation index (CII). This leads to the adjusted cost becoming higher than the selling price, so there is no taxable capital gain.

The indexed route multiplies his 2005 cost by just over three, using the CII values of 117 for 2005-06 and 376 for 2025-26. The cost is calculated as ₹40 lakh × 376/117, which comes to about ₹1.29 crore. This means the inflation-adjusted purchase cost is higher than the selling price of ₹1 crore. Here’s the calculation:

• Indexed cost of ₹40 lakh property = Original purchase price × (CII for sale year/CII for purchase year)
• Purchase price in 2005: ₹40,00,000
• CII for 2005-06: 117
• CII for 2025-26: 376

So:

• Indexed cost = ₹40,00,000 × (376/117)
• Indexed cost = ₹40,00,000 × 3.214
• Indexed cost = ₹1,28,56,000 approximately
• Then compare it with the sale price:
• Sale price: ₹1,00,00,000
• Indexed cost: ₹1,28,56,000
• Taxable gain = ₹1,00,00,000 – ₹1,28,56,000 = negative

So the taxable gain is treated as nil. The sale price now sits below the indexed cost, no taxable gain survives, and your bill under this route is zero.

Two more reliefs can shelter a genuine gain.

Section 54 exempts long-term capital gains (LTCG) if you buy another house within two years or build one within three. This exemption is capped at ₹10 crore.

Section 54EC lets you park up to ₹50 lakh of LTCG in specified government-backed bonds (like REC, IRFC, or PFC), locked in for five years. You must invest within six months to avail this exemption.

2. The income your inheritance earns is taxed every year.

The assets arrive tax-free, but whatever they earn from then on belongs in your return.

Rent from an inherited flat is taxed as Income from House Property, after a 30% standard deduction. This deduction covers maintenance and repair costs regardless of actual expenses.

Interest from inherited deposits and dividends from an inherited portfolio fall under ‘Income from Other Sources’ at your slab rate.

Plenty of families miss this, treat the whole inheritance as permanently untaxed, and meet the income tax notice later.

3. Gift tax in India depends on one question, is the giver a relative?

Gift tax in India follows a single categorisation. Under Section 56(2)(x) of the Income-tax Act, gifts are taxed in the recipient’s hands. Gifts from specified relatives are exempt, while gifts from non-relatives may be taxable.

3.1 Gifts from relatives stay 100% tax exempt.

The Indian law’s list of relatives is specific. It covers your spouse, your siblings, your spouse’s siblings, the siblings of either of your parents, your lineal ascendants and descendants, your spouse’s lineal ascendants and descendants, and the spouses of every person on that list.

A gift from anyone here is 100% tax exempt, whatever the size, so a ₹50 lakh cheque from a parent or a flat from a grandparent carries no income tax.

3.2 Gifts from non-relatives are taxed above ₹50,000.

Everyone outside that list is a non-relative, including friends, cousins, and colleagues. Once their cash gifts to you cross ₹50,000 in aggregate in a year, the entire amount becomes taxable at your slab rate. For example, ₹60,000 received means you will pay tax on the full ₹60,000.

A property received free from a non-relative follows the same logic, with the whole stamp duty value taxed once it exceeds ₹50,000. Buy a property below its stamp duty value and the shortfall is taxed too, once it exceeds the higher of ₹50,000 or 10% of the price you paid.

Money from your uncle makes you exempt, because he is your parent’s brother, while the same cheque from your nephew is taxable in your hands, because a nephew appears nowhere on your list.

4. Two receipts escape the relative test altogether.

Gifts received on the occasion of your own wedding are exempt whoever gives them, and anything received through a Will or inheritance is exempt for the reasons this article opened with. Both sit outside the relative and non-relative categorisation entirely.

One trap remains for families moving money around to save tax. Gift an asset to your spouse or minor child and Section 64 clubs the income it earns back into your own return, with only ₹1,500 per child exempt for minors. The tax you meant to move comes straight home.

5. Stamp duty is the separate bill on gifted property.

A gift deed for property must be stamped and registered even when no income tax applies. Maharashtra shows how steeply the cost turns on relationships.

Residential or agricultural property gifted to your spouse, children, grandchildren, or a deceased son’s wife attracts a flat ₹200 in stamp duty, with the registration fee capped at ₹200 as well.

Gifts to the wider family circle, parents and siblings included, are charged at 3% of the property’s market value under the state’s Ready Reckoner rates, and gifts beyond family attract the regular conveyance rates for the location, around 5% to 6% (4%-5% for female buyers) in Mumbai.

Your exact figure sits in the Ready Reckoner on the Maharashtra Department of Registration and Stamps portal, and other states run their own scales.

Planning turns a tax-free inheritance into protected family wealth

India hands your family a rare advantage by charging nothing at the time wealth transitions from one generation to another. Treat Will and Estate planning equally important, alongside other core pillars of your financial plan.

A Qualified Advisor folds your Will and estate decisions into the rest of your money, across investments, taxes, insurance, and retirement, so you get unbiased, personalised advice. Getting that structure right today, while inheritance tax in India stays off the books for the time being, protects both your legacy and your family’s peace of mind.