Inherited Shares: The price of equity held by parents sets your gain

When you sell shares inherited from parents, capital gains tax is calculated using your parents’ original purchase price and holding period—not the market value on the date of inheritance or death.

Under Section 49(1) of the Income Tax Act, the cost of acquisition for inherited shares is deemed to be the cost at which the previous owner (your parent) acquired them, plus any documented cost of improvement. The fair market value on the date of death or inheritance is irrelevant for computing capital gains.

If the shares were acquired by your parent before April 1, 2001, you can opt to use the fair market value as on April 1, 2001, as the cost of acquisition for long-term capital gains computation. For listed shares acquired before February 1, 2018, the cost is the higher of the original purchase price or the lower of (a) the highest price quoted on January 31, 2018, and (b) the actual sale price—this is the grandfathering provision to protect gains accrued up to that date.

Your holding period includes the time your parent held the shares. For listed equity shares, if the total holding (parents’ plus yours) exceeds 12 months, gains are classified as long term and taxed at 12.5 per cent on gains above Rs 1.25 lakh in a financial year (without indexation).

If held for 12 months or less, gains are short term and taxed at 20 per cent. For unlisted shares, the long-term holding period is 24 months, and long-term capital gains is taxed at 12.5 per cent without indexation.

If your father bought 1,000 shares at Rs 100 in 2010 and you inherit them in 2024 when they’re worth Rs 500, your cost remains Rs 100 per share. If you sell in 2026 at Rs 700, your long-term capital gain is Rs 600 per share (Rs 700 –Rs 100), taxed at 12.5 per cent on the amount exceeding Rs 1.25 lakh.