Tax Treatment of Assets & Income After Death in India: Capital Gains, Rental Income & Inheritance (2026 Guide)

A common belief in India is: “Assets received after death are completely tax-free.” This is partially true. While inheritance itself is not taxed, income generated from inherited assets and sale of such assets can attract income tax. This guide expla...

A common belief in India is:

“Assets received after death are completely tax-free.”

This is partially true.

While inheritance itself is not taxed, income generated from inherited assets and sale of such assets can attract income tax.

This guide explains the exact tax treatment of assets and income after death, with clarity for FY 2025–26.

Is Inheritance Taxable in India?

✅ No inheritance tax in India

Receiving assets such as:

Property
Shares
Mutual funds
Bank balances
Gold

➡️ is NOT taxable at the time of receipt

Taxation Begins When…

Tax liability arises when:

Inherited assets generate income, or
Inherited assets are sold

Capital Gains on Inherited Assets

When Does Capital Gains Arise?

Only when the legal heir sells the inherited asset.

Cost of Acquisition Rule

Particular	Rule
Cost of acquisition	Cost to previous owner
Holding period	Includes previous owner’s period
Indexation	Available from original purchase year

📌 This rule significantly reduces tax liability.

Example – Inherited Property

Father bought property in 2005 for ₹20 lakh
Inherited in 2024
Sold in 2025 for ₹1.2 crore

➡️ Long-term capital gains apply
➡️ Indexation allowed from 2005

Tax on Rental Income After Death

Who Pays Tax?

Period	Taxable In
Rent earned till date of death	Deceased’s ITR
Rent earned after death	Legal heir’s ITR

Standard Deduction

30% deduction available under Section 24(a)

Tax on Interest Income After Death

Includes:

Bank interest
FD interest
Savings account interest

📌 Interest after death is taxable in the hands of:

Legal heir, or
Estate of deceased (if not yet distributed)

Inherited Shares & Mutual Funds

Event	Tax Treatment
Receipt by heir	Not taxable
Sale by heir	Capital gains apply
Holding period	Includes previous owner’s period

💡 Most inherited equity assets qualify as long-term, reducing tax.

Exemptions Available on Sale of Inherited Property

Section 54 / 54F

Reinvestment in residential property
Available to legal heirs

Section 54EC

Investment in specified bonds
Limit: ₹50 lakh

Business Assets & Income After Death

If business continues:

Income taxable in legal heir’s hands
Depreciation allowed

If business discontinued:

Capital gains rules apply on asset sale

What About Jointly Owned Assets?

Surviving co-owner becomes full owner
Income taxable proportionately
Sale attracts capital gains for surviving owner

Common Mistakes to Avoid

❌ Assuming income after death is tax-free
❌ Ignoring capital gains on inherited property
❌ Not applying indexation correctly
❌ Mixing estate income with personal income incorrectly

How WonderTax Helps

WonderTax assists with:

Capital gains calculation on inherited assets
Rental income tax planning
Legal heir ITR filing
Exemption planning (54/54F/54EC)

👉 https://wondertax.in/services/income-tax-filing
👉 https://wondertax.in/services/capital-gains

FAQs

Is inheritance taxable in India?
No, inheritance is tax-free.

Do heirs pay capital gains on inherited property?
Only when they sell it.

Can legal heirs claim indexation benefit?
Yes, from the previous owner’s purchase date.

Is rental income after death taxable?
Yes, in the hands of the legal heir.

Final Takeaway

✔️ Inheritance itself is tax-free
✔️ Income and sale are taxable
✔️ Proper planning saves substantial tax

👉 Handle inherited assets smartly to avoid future tax shocks.