How Are Capital Gains Taxed on Inherited Shares?
When shares are inherited, the inheritance itself is generally not treated as a taxable transfer for capital-gains purposes. If the inherited shares are later sold, the capital gain is generally worked out using the previous owner's cost of acquisition, with the applicable holding-period rules taking the previous owner's period into account.
Quick Answer
For shares, calculate the capital gain from sale consideration less the applicable cost of acquisition and eligible transfer expenses, then determine the short-term or long-term character and apply the rate rules for the relevant year. The relevant asset or transaction named in this question should be identified before applying the capital-gains computation and rate rules. This page specifically addresses “How Are Capital Gains Taxed on Inherited Shares”.
Does inheriting shares itself create a capital gain?
Inheritance is a specified mode of acquisition under the capital-gains rules. The tax question normally arises when the beneficiary subsequently transfers the inherited shares. Section 49 provides the cost rule for assets received by succession, inheritance or devolution.
What is the cost of inherited shares?
For shares acquired through inheritance, the cost of acquisition is generally deemed to be the cost for which the previous owner acquired the shares, adjusted for eligible cost of improvement where relevant. Therefore, the beneficiary should not ordinarily substitute the market value on the date of inheritance merely because the shares changed hands.
What is the holding period?
The holding period of the previous owner is generally relevant when determining whether the inherited shares are short-term or long-term. This can be important because the applicable tax treatment depends on the nature of the security and its holding period.
Example
Suppose a parent purchased shares for ₹2,00,000 several years ago and the shares were inherited by the child when their market value was ₹8,00,000. If the child later sells them for ₹10,00,000, the capital-gains calculation generally starts with the previous owner's eligible cost rather than automatically using ₹8,00,000 as the acquisition cost.
What records should be retained?
- Original purchase contract notes or broker statements
- Demat and transmission records
- Corporate-action statements
- Evidence of the previous owner's acquisition cost
- Sale contract note and brokerage details
How to report inherited shares in the ITR
The eventual sale should be reported under the applicable capital-gains schedules of the ITR. The correct ITR form depends on the taxpayer's complete income profile, not merely on the fact that the shares were inherited.
Related EZTax Questions
- What Is Capital Gain in Income Tax?
- What Is Short-Term and Long-Term Capital Gain?
- How to Calculate Capital Gain From Shares?
- What Is Cost of Acquisition for Capital Gains?
- Which ITR Form Should I Use for Capital Gains?
