ITR Filing FY25: Is Capital Gain from Ancestral Property Taxable in India?

An ancestral property is typically defined as any property inherited up to four generations of male lineage, without any partition. It becomes the legal property of the inheritor upon succession and is treated as a capital asset under the Income Tax Act, 1961. ITR filing FY25 has began and understanding the holding period and applicable tax rates on inherited property has become even more crucial for sellers in 2025.

Taxability of Capital Gains on Sale of Ancestral Property

If you are wondering if your inherited property is taxable in FY25, here’s the guide. When you sell an ancestral property, the capital gain, the profit made from the sale, is taxable in the hands of the seller. The taxation depends on the holding period of the property:

• Short-Term Capital Gain (STCG): If the property is held for less than 24 months before the sale, the gain is classified as short-term and taxed as per the individual’s income tax slab.
• Long-Term Capital Gain (LTCG): If the property is held for more than 24 months from the date of acquisition, the resulting gains are treated as Long-Term Capital Gains (LTCG) and taxed as follows: 
  - For sales made before July 23, 2024: LTCG is taxed at 20% with the benefit of indexation. 
  - For sales made on or after July 23, 2024: LTCG is taxed at 12.5% without indexation, or 20% with indexation, whichever is more beneficial, only if the property was originally purchased before July 23, 2024. If the property was acquired on or after this date, the LTCG will be taxed at 12.5% without indexation.

How is Capital Gain on Ancestral Property Calculated?

For inherited property, the cost of acquisition is not what the current owner paid (since it was inherited), but what the original buyer (ancestor) paid.

Capital Gain = Sale Price – Indexed Cost of Acquisition – Transfer Expenses

• The Indexed Cost is calculated using the Cost Inflation Index (CII), considering the year the ancestor acquired the property.
• If the property was acquired before April 1, 2001, the taxpayer can consider the Fair Market Value (FMV) as on April 1, 2001, as the cost of acquisition.

Let us understand this with an example. Mr. Verma purchased a residential flat on June 1, 2005, for ₹40 lakh. His son, Raj, inherited the property in 2016 after Mr. Verma’s demise. In July 2025, Raj decided to sell the inherited flat for ₹1.65 crore.

Since this is an inherited property, the cost of acquisition for capital gains calculation will be based on what Mr. Verma originally paid. Raj is also eligible for indexation, as this is a long-term capital asset.

Calculation of Capital Gain With Indexation

• Purchase Price (FY 2005–06): ₹40,00,000
• CII for FY 2005–06: 117
• CII for FY 2025–26: 363
• Indexed Cost of Acquisition = ₹40,00,000 × (363 / 117) = ₹1,24,10,256
• Sale Price = ₹1,65,00,000

Capital Gains = Sale Price – Indexed Cost

= ₹1,65,00,000 – ₹1,24,10,256 = ₹40,89,744

Long-Term Capital Gain Tax Calculation

Since the property was originally purchased before July 23, 2024, Raj can choose between:

• 12.5% without indexation
• 20% with indexation

Let’s compare both:

• With Indexation (20%): LTCG = ₹40,89,744. Tax = ₹40,89,744 × 20% = ₹8,17,949
• Without Indexation (12.5%): Purchase Cost = ₹40,00,000 
  Gain = ₹1,65,00,000 – ₹40,00,000 = ₹1,25,00,000 
  Tax = ₹1,25,00,000 × 12.5% = ₹15,62,500

Since the tax liability is lower with indexation, Raj can opt for 20% with indexation, resulting in a tax of ₹8.17 lakh on the capital gains of ₹40.89 lakh.

Are There Tax Exemptions on Capital Gain from the Sale of Property?

Yes, capital gains from the sale of ancestral property can be exempted under the following sections, provided conditions are met:

• Section 54: If the proceeds are used to purchase or construct a new residential property.
• Section 54EC: If invested in specified bonds (e.g., NHAI, REC) within 6 months of sale.

Also Read: ITR Filing 2025: Switched Jobs This Year? Here's Why You Need Multiple Form 16s for Tax Filing!

Conclusion

Capital gains from the sale of ancestral property are taxable, but with proper planning, like using indexation and claiming exemptions under Sections 54 or 54EC, one can significantly reduce the tax burden. It is advisable to consult a tax expert to calculate gains accurately and explore legal tax-saving avenues.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.