Receiving shares via inheritance is not a taxable event, but selling them attracts capital gains tax. Investors must calculate the cost basis using the original owner’s purchase price or the January 31, 2018, value. Long-term gains above Rs 1.25 lakh are now taxed at 12.5%, without indexation benefits.
When a person inherits shares, the transfer of these assets itself is not considered a taxable event under the Income Tax Act. However, the situation changes when the successor eventually decides to sell these inherited equities. To calculate capital gains tax, investors must first determine the original cost of acquisition, which is essentially the price the original owner paid for the shares.
Determining the Cost Basis
Because the inheritance is not treated as a new purchase, the cost of acquisition for the beneficiary is the same cost incurred by the person who originally bought the shares. If the shares were purchased before April 1, 2001, taxpayers are allowed to use the Fair Market Value (FMV) of the shares as of that date as the cost basis to calculate their gains.
For shares purchased after this date, the grandfathering rule introduced in the 2018 Union Budget remains vital. If the original owner bought the shares before February 1, 2018, the investor can use the closing price of the stock on January 31, 2018, as the cost basis. This rule applies even if the shares were transferred or moved to a demat account much later. The key for the investor is to ensure they have the documentation that proves the predecessor held the shares before the February 2018 deadline, as this establishes the cost basis for calculating potential profit.
Tax Rates and Holding Period
It is important for beneficiaries to understand that the holding period of the original owner is added to their own. This helps determine whether the shares qualify as long-term capital assets. Once the shares are sold, any long-term capital gain exceeding Rs 1.25 lakh is subject to a flat 12.5% tax rate.
Unlike previous tax regimes, the benefit of indexation, which allowed investors to adjust their purchase cost for inflation, is no longer available. When reporting these transactions in income tax returns, taxpayers must aggregate all long-term gains from listed equity and equity-oriented mutual funds to see if they exceed the Rs 1.25 lakh exemption limit. Keeping accurate records, including the original purchase contract or contract notes of the predecessor, is essential for tax compliance. If the original purchase price is unavailable, tax authorities may consider the cost of acquisition as nil, which could significantly increase the tax burden on the successor. Therefore, maintaining a clear paper trail is the most important step for anyone managing inherited stock portfolios.