"I inherited the shares, so my cost is zero": What ITA 2025 actually says

An NRI in Singapore inherits 4,000 shares of an Indian listed company from her father, who bought them in 2009 for ₹90 per share. She sells them in September 2026 at ₹1,480. Her broker's contract note shows a sale value of ₹59.2 lakh, and she assumes the whole ₹59.2 lakh is her capital gain — because she paid nothing for the shares. That single assumption inflates her tax bill by roughly ₹4.5 lakh and, worse, makes her believe she owes short-term tax at 20% because she "held" the shares for only a few weeks.

Both beliefs are wrong. Indian law does not treat inherited shares as zero-cost, and it does not restart your holding period on the date of death. The rules that fix this are among the most taxpayer-friendly provisions in the Act, and they survive intact into the Income Tax Act, 2025.

What the law actually says

Three separate provisions work together here, and you need all three.

One: inheritance itself is not a taxable transfer. Section 47(iii) of the Income Tax Act, 1961 — carried forward into the corresponding "transactions not regarded as transfer" provisions of ITA 2025 — excludes any transfer of a capital asset under a gift, will, or an irrevocable trust from the definition of transfer. No capital gains arise on the date your parent dies, on the date the demat transmission completes, or on the date the company's registrar updates the member register. The taxable event is your eventual sale, and only that.

Separately, Section 56(2)(x) of ITA 1961 — the provision that taxes gifts received without consideration above ₹50,000 — carries an express carve-out for property received under a will or by way of inheritance. So there is no "gift tax" either. And India has had no estate duty since the Estate Duty Act was abolished in 1985. Three different taxes people fear on inheritance, and none of them apply.

Two: your cost is your parent's cost. Section 49(1) of ITA 1961, retained in substance under ITA 2025, says that where a capital asset becomes the property of the assessee under a will or by succession, the cost of acquisition is deemed to be the cost to the previous owner, increased by any cost of improvement incurred by either of you. The father in our example paid ₹90 per share. That ₹90 is the daughter's cost. Not zero. Not the market value on the date of death. Not the value declared in the probate petition.

Where the previous owner also acquired the asset by inheritance or gift, the chain goes back further — Section 49(1) keeps tracing until it reaches the last owner who acquired the asset by actual purchase or construction.

Three: your holding period includes your parent's holding period. The Explanation to Section 2(42A) of ITA 1961 provides that in determining the period for which a capital asset is held by an assessee in a case falling under Section 49(1), the period of holding by the previous owner is included. ITA 2025 preserves this and applies it under the Tax Year framework — note that ITA 2025 has replaced "Previous Year" and "Assessment Year" with a single "Tax Year", so you now report a sale made in September 2026 in Tax Year 2026-27.

Combine the three and the picture is straightforward: cost ₹90, holding period running from 2009, sale in 2026. Long-term, comfortably.

Practical implications for NRIs

The threshold that decides everything is the holding period. For listed equity shares and units of listed equity-oriented mutual funds, the qualifying period is 12 months. For unlisted shares — your family's private limited company, an unlisted startup ESOP block — it is 24 months. With the previous owner's period added on, inherited shares are almost always long-term. The exception that actually bites is where a parent bought shares shortly before death: a purchase in March 2026 and a sale by the heir in November 2026 is still short-term, because the combined period is under 12 months.

The rates, as they stand for Tax Year 2026-27. Long-term capital gains on listed equity sold on a recognised stock exchange with STT paid are taxed under Section 112A at 12.5%, with the first ₹1.25 lakh of such gains in the tax year exempt. Short-term gains on the same class of shares are taxed under Section 111A at 20%. Unlisted shares attract 12.5% long-term under Section 112, without indexation, following the July 2024 overhaul; short-term gains on unlisted shares are taxed at your slab rate.

Grandfathering passes down with the shares. This is the part most heirs miss entirely. Section 55(2)(ac) provides that for listed equity acquired before 1 February 2018, the cost of acquisition is the higher of (a) the actual cost, and (b) the lower of the fair market value as on 31 January 2018 and the full value of consideration on sale. Because Section 49(1) steps you into the previous owner's shoes, this benefit travels with the inheritance.

Run our Singapore example properly. Actual cost to the father: ₹90. FMV on 31 January 2018, say ₹610. Sale consideration ₹1,480. Lower of (₹610, ₹1,480) is ₹610. Higher of (₹90, ₹610) is ₹610. Deemed cost is therefore ₹610 per share, not ₹90 and certainly not zero.

Gain = (₹1,480 − ₹610) × 4,000 = ₹34.8 lakh. Less the ₹1.25 lakh Section 112A exemption = ₹33.55 lakh taxable. At 12.5%, tax is approximately ₹4.19 lakh, plus applicable surcharge and 4% cess. Against the ₹59.2 lakh she thought was her gain — which at 12.5% would have been ₹7.4 lakh before surcharge, and far more had she treated it as short-term at 20% — the correct computation saves her a very large number.

Indexation is gone, and that changes inherited-asset strategy. Before July 2024, heirs of long-held unlisted shares relied on indexation to lift a 2009 cost into 2026 rupees. That relief no longer exists for these classes. What remains valuable is the grandfathered 31 January 2018 FMV for listed equity — which is why establishing that figure is now the single highest-value piece of documentation work in an inherited-shares file.

Residency of the heir does not change the cost or the holding period. Whether you are resident, RNOR, or NRI, Sections 49(1) and 2(42A) apply identically. What changes is collection mechanics and repatriation, covered below.

TDS behaves differently than most NRIs expect. On listed equity sold on-market through a recognised exchange with STT paid, there is no TDS deduction by the broker — the counterparty is anonymous, and Section 195 has no practical application. The NRI heir must discharge the liability through advance tax instalments. On unlisted shares sold to an identifiable buyer, Section 195 applies and the buyer must deduct at the applicable rate plus surcharge and cess, usually on the gross consideration unless you obtain a lower-deduction certificate under Section 197.

Step-by-step: what to do

• Complete transmission before you think about tax. For demat holdings, submit the transmission request to your Depository Participant with the death certificate, the nominee or legal heir documents, and the client master report. For physical shares, file Form ISR-5 with the company's RTA along with the transmission request form. Transmission is not a transfer — no stamp duty on transfer applies, and no capital gains arise at this step.
• Reconstruct the previous owner's cost and acquisition date. Pull your parent's contract notes, demat transaction statements, and bonus/split/rights history. Where records are lost, the RTA can confirm the date of allotment or the date the folio was credited. Keep a written note explaining how each figure was derived — this is what an assessing officer asks for.
• Fix the 31 January 2018 FMV for each listed scrip. Use the highest price quoted on a recognised stock exchange on 31 January 2018. Where the share was not traded that day, use the highest price on the immediately preceding date on which it was traded. Save the exchange bhavcopy or a dated screenshot for each scrip.
• Apply the three-step grandfathering formula scrip by scrip. It is not portfolio-level. A share that has fallen since 2018 will not benefit, and running the formula on the whole portfolio gives you the wrong answer.
• Adjust for corporate actions across the ownership chain. Bonus shares issued to your father carry a nil cost with their own acquisition date. A stock split changes per-share cost but not aggregate cost. A rights issue subscribed by your father is a separate acquisition at its own price and date. These adjustments sit inside the inherited block, not outside it.
• Pay advance tax in the quarter you sell. Capital gains are excluded from the standard interest computation only if you pay the full tax on the gain in the remaining instalments after the sale. Miss that and Section 234C interest runs. For a September sale, that means the 15 December and 15 March instalments.
• Reconcile against Form 26AS (now Form 168 under ITA 2025) and your AIS. Sale transactions reported by the depository appear here with gross consideration and no cost. Mismatches between the AIS figure and your computed gain are the single most common trigger for a Section 133(6) query on inherited-share sales.
• File ITR-2 with Schedule CG completed for each scrip, and complete Schedule 112A line by line — ISIN, name, number of units, sale consideration, 31 January 2018 FMV, and cost of acquisition. The schedule is designed around the grandfathering formula, and leaving the FMV column blank is how heirs accidentally file at the higher figure.
• For repatriation, plan the route before the sale. Sale proceeds of inherited assets are credited to your NRO account. Outward remittance uses Form 15CA (now Form 145 under ITA 2025) and, where required, Form 15CB (now Form 146 under ITA 2025), and runs against the USD 1 million per financial year limit for NRO remittances.

FAQ

Is the fair market value on the date of death my cost of acquisition?
No. That is the American step-up-in-basis rule, and India has never had it. Section 49(1) fixes your cost as the previous owner's cost. The date-of-death valuation is used for probate and succession documentation, not for computing capital gains.

My father inherited these shares from my grandfather. Whose cost do I use?
Your grandfather's — specifically, the cost incurred by the last owner in the chain who acquired the shares by actual purchase or subscription. Section 49(1) traces back through successive inheritances until it reaches that person. The combined holding period runs from that acquisition date too.

I received the shares under a nomination rather than a will. Does anything change?
Not for tax. Section 49(1) and the Explanation to Section 2(42A) apply to succession however it occurs. A nomination determines who the company or depository delivers to; the will or succession law determines beneficial entitlement. Where the two conflict, resolve the entitlement question before selling, because the person who sells is the person assessed.

Can I claim the ₹1.25 lakh exemption if I am an NRI?
Yes. The Section 112A exemption on long-term gains from listed equity is not restricted by residential status. What NRIs cannot claim is the basic exemption limit set-off against these special-rate gains where total income consists only of such gains — a separate restriction that catches heirs with no other Indian income.

For your specific situation, book a consultation at harunraaj.com

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See Also

• "Just sell and rebuy on March 31 to reset your gains": What ITA 2025 actually says about capital gains harvesting
• "Book ₹1.25 lakh of gains every year and pay zero tax": What ITA 2025 actually says
• "I'll just park it in NHAI bonds": What Section 54EC actually says in 2026

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