Built a new house on inherited land? Here’s how you’ll be taxed if you decide to sell
Kochi-based Ramesh Nair inherited a 1-acre plot in Pune that his father had bought for ₹25 lakh in 2015. Over the next three years, Ramesh built a house on it at a cost of ₹50 lakh. In 2025, he sold the property for ₹2 crore, with ₹60 lakh attributed to land and ₹1.4 crore to the house. Since the land’s holding period exceeded 24 months (including his father’s 10 years), it qualified as a long-term capital gain (LTCG). By applying indexation to both land and construction costs and claiming exemptions under Section 54, Ramesh was able to significantly reduce his tax liability. portion
Inherited land? Here’s how it impacts your tax
When you inherit land, the cost of acquisition for tax purposes is the cost at which the previous owner (who owned the land before you inherited it) acquired the land.
“When you build a house (or any improvement) on that land, your construction cost becomes the cost of the improvement. So on sale, the total cost includes: (a) the inherited land’s original cost (of the previous owner) and (b) your actual construction cost of the house,” says Abhishek Soni, CEO and co-founder, Tax2win.
The law allows you to include the period the previous owner held the land when calculating your holding period. For example, if the previous owner held the land for 10 years and you held it for 3 years, your total holding period is effectively 13 years.
“For immovable property (land/building) in India, if the holding period exceeds 24 months (i.e., more than 2 years), the gain is treated as long-term capital gain (LTCG). If the period is 24 months or less, the gain is treated as short-term capital gain (STCG) and taxed at your normal slab rate,” says Soni.
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Here’s why you must split the sale value between land and building
The sale consideration must be split between the land portion and the building. This is important because the cost base and tax treatment for each portion can differ.
The holding period is reckoned separately for each component. For the land, it includes the tenure for which the predecessor held it; for the building, the period commences from the date of completion of construction by the inheritor.
“Consequently, upon sale, the transaction is apportioned between land and building, and capital gains are computed distinctly for each. Where either component is held for more than two years, it qualifies as a long-term capital asset; otherwise, the gain is treated as short-term,” says Dinesh K. Jain, Managing Partner, Dinesh Aarjav Associates, Chartered Accountants.
For the land portion, you use the inherited cost (previous owner’s cost), and the holding period includes the previous owner’s period.
For the building portion, you use your construction cost (cost of improvement). When you sell, you subtract the (indexed) cost of acquisition for land and the (indexed) cost of improvement for the building from the respective sale portions. The split matters because one portion might qualify as LTCG (if the holding period is long), and indexation may apply. An improper split or one not supported by documentation can result in higher taxes or a dispute with tax authorities.
“In case you have built the house and sold the portion of it within 24 months of completion of the construction, it will be treated as a short-term capital asset,” says Deepak Kumar Jain, Founder and CEO of TaxManager.in.
The registered valuer should be able to ascertain the land value and house built value separately based on the circle or market rates. “Once the value is ascertained alongside the holding period, long-term or short-term calculations will come into the picture,” says Jain.
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How indexation and exemptions reduce your taxable gain
Indexation: If the property is long-term (holding more than 24 months), you can apply indexation both to the inherited land cost (previous owner’s cost) and to your construction cost (cost of improvement). This inflates the cost base to reflect inflation, thereby reducing taxable LTCG.
Tax rate difference: If the gain is short-term, you pay tax at your normal income-tax slab rate (no indexation). If the gain is long-term, the typical rate for immovable property is 20% (after indexation) for LTCG.
Deduction/exemption options: You may be eligible for exemptions under Section 54 (if you reinvest LTCG in buying/constructing a new residential house), Section 54F, or Section 54EC (investing in certain bonds); these apply to the LTCG part if the conditions are met.
“The building cost helps reduce LTCG because your cost base is higher due to your improvement expense (which is indexed). The land portion benefit is that you gain from the long-holding period and original (often low) cost, with indexation if applicable,” says Soni.
Things to note
It is important to note that before July 23, 2024, LTCG on land/building equals 20% after indexation. After July 23, 2024, LTCG is 12.5% without indexation.
According to the grandfathering rule, you can compare both methods (old vs. new), whichever gives a lower tax will apply.
“If the sale is effected shortly after completion of the construction, the seller may face adverse tax implications, particularly as the building portion would attract short-term taxation, depriving the taxpayer of indexation and long-term capital gain benefits,” says Jain of Dinesh Aarjav & Associates.
Hence, timing the sale judiciously and maintaining meticulous documentation can make a substantial difference in optimising tax outcomes.
