Imagine you are reviewing an HNI client’s portfolio transition, where an inheritance of high-value equity shares has just occurred. Your client intends to liquidate a portion of the inherited holding to diversify into real estate, but they are concerned about the immediate tax burden. As an analyst, your model must account for the fact that under the Indian Income Tax Act, the inheritance itself is not a taxable event.
However, the subsequent sale of these assets triggers capital gains based on the original cost of acquisition incurred by the previous owner. Failing to integrate this ‘carry-over’ cost into your long-term return projections can lead to significantly inflated net-of-tax wealth estimates.
The logic underpinning this is rooted in the principle of continuity. In India, assets received through inheritance or a will are generally excluded from the definition of a ’transfer’ for capital gains purposes. Consequently, when the beneficiary eventually sells the asset, the tax authorities look back to the cost incurred by the previous owner who actually acquired the asset through a purchase. This ensures that the tax liability that was deferred during the transfer is captured upon the eventual disposal of the asset to a third party.
Consider a case where a client inherits shares purchased by their father in 2010 for ₹5 lakhs. If the market value at the time of inheritance in 2024 is ₹20 lakhs and the client sells them for ₹25 lakhs, the capital gains are not calculated against the ₹20 lakh inheritance value. Instead, the cost of acquisition is ₹5 lakhs, meaning the taxable gain is ₹20 lakhs.
If you were advising the client, you would need to calculate the indexation benefits or the applicable tax slab on this ₹20 lakh figure to provide an accurate ‘in-hand’ return. Miscalculating this specific cost base can result in poor liquidity planning, where the client finds themselves with insufficient cash to meet their tax obligations after the sale is completed.
In your valuation work, this necessitates a clear distinction between the book value for accounting purposes and the tax-adjusted cost base for exit planning. When modeling family trusts or settlements, these tax implications dictate the timing of liquidations. By deferring sales or opting for intra-family transfers within the bounds of a family settlement—which does not attract capital gains tax—analysts can help clients optimize their net worth.
Always remember that the fiscal objective is to align the exit strategy with the most tax-efficient structure available under current law, rather than focusing solely on the nominal appreciation of the asset.1
Nuance
Check Your Understanding
Mr. A inherits a plot of land from his father. The father purchased the land for ₹10 lakhs in 2005. At the time of the father’s death in 2023, the fair market value was ₹50 lakhs. Mr. A sells the land in 2024 for ₹60 lakhs. What is the cost of acquisition for Mr. A for capital gains purposes?
Which of the following scenarios describes a transaction that does NOT typically trigger a capital gains tax event in India?
This is a companion read for Section 15.5 — Family Settlement from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.
Copyright © 2026 Akhilesh Gururani. All rights reserved.
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Under Section 49(1) of the Income Tax Act, the cost of acquisition of an asset in the hands of the successor is the cost for which the previous owner acquired it. This provision effectively prevents the ‘step-up’ of cost basis that is common in other jurisdictions. ↩︎