A recent ruling by the Surat bench of the Income Tax Appellate Tribunal (ITAT) in the case of Adil Noshirvan Shethna vs ITO reaffirmed that when calculating long-term capital gains (LTCG) on inherited property, indexation of the cost must be applied from the year the original owner first acquired the asset, rather than the year it was inherited by the heir.
This interpretation has a direct impact on homeowners’ tax liability, as it allows indexation to be calculated over the entire holding period of the property rather than only the years following inheritance. In practical terms, this could result in tax savings of around 30% to 37% compared with applying indexation only from the year the property was inherited.
Arvind Rao, a 52-year-old consultant based in Bengaluru, inherited a residential property from his father in 2018. The house had originally been purchased in 1996. In 2026, Arvind sold the property for 1.80 crore. Initially, he assumed indexation would apply only from 2018, the year of inheritance, which would have significantly increased his taxable capital gains.
However, relying on recent ITAT jurisprudence, he calculated indexation from 1996, the year his father acquired the property, and adopted the Fair Market Value as of April 1, 2001. This substantially increased his acquisition cost index and reduced his taxable gains. As a result, Arvind saved nearly ₹10 lakh in long-term capital gains tax, demonstrating how correctly applying holding period rules can materially lower tax liability.
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For those unaware, if you sell a property held for more than 24 months, long-term capital gains are taxed at 12.5% without indexation from July 23, 2024. However, for properties purchased earlier, sellers can choose the lower tax liability between 12.5% without indexation and 20% with indexation.
What the ITAT ruling says
“… the recent ITAT ruling in Adil Noshirvan Shethna vs ITO, February 2026, adds important weight to the steadily evolving jurisprudence that indexation for inherited property must begin from the year the original owner first acquired the asset,” says B. Shravanth Shanker, Managing Partner, B. Shanker Advocates LLP. If acquired before 1 April 2001, taxpayers may substitute the fair market value as of that date as the cost of acquisition.
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“While this ruling does not establish any new principles, it affirms the settled legal position regarding the year of commencement of indexation benefits on inherited property. Revenue authorities generally contend that indexation should begin from the year the taxpayer inherits the property, rather than from the date of acquisition by the previous owner,” says SR Patnaik, Partner (head – taxation), Cyril Amarchand Mangaldas.
This interpretation has a direct, measurable impact on the tax burden of individual homeowners because it allows indexation to cover the entire historical holding period rather than only the short period after inheritance. As a result, the indexed cost base increases substantially and taxable long-term capital gains correspondingly reduce.
“In practical terms, homeowners can realistically expect tax savings in the range of 30% to 37% when compared to the approach of granting indexation only from the inheritance year. For property sales of around one to two crores, this typically translates into a reduction of approximately eight to twelve lakhs in tax liability, with proportionately higher savings for larger transactions,” says Shanker.
“Individuals inheriting property should now view it as a core, tax-advantaged asset rather than a liability to be liquidated quickly, especially where the original holding period exceeds fifteen to twenty years,” he adds.
Getting the holding period right matters
Retail taxpayers can avoid overpaying capital gains tax by adopting a few disciplined safeguards in light of the recent jurisprudence on indexation.
“First, sellers must clearly establish the correct holding period by using the original owner’s acquisition date in cases of inheritance and not the year in which the property came into their hands,” says Patnaik.
Second, every computation should apply the correct cost inflation index figures for the precise financial years involved, since even a minor error in selecting the base year can inflate tax liability substantially. Third, taxpayers should meticulously document all deductible components such as stamp duty, registration charges, brokerage, legal fees and genuine capital improvements, as these directly reduce taxable gains.
For properties acquired before 2001, obtaining a registered valuer’s report to adopt the fair market value as on 1 April 2001 is often the single most effective step to prevent excess taxation.
“Equally important is reconciling the Annual Information Statement and Form 26AS before filing returns so that automated mismatches do not result in incorrect demands. Using the correct return form, ordinarily ITR-2, and accurately filling Schedule CG ensures that the computation is presented in the statutorily required format,” says Patnaik.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
