LTCG on unlisted foreign shares acquired in inheritance from a US resident by Indian resident

• Cost Basis: The client cannot use the US stepped-up FMV at the date of death. Under Section 49(1) of the Indian Income Tax Act, the cost of acquisition must be the original cost/FMV at vesting to the previous owner.

• Period of Holding: The previous owner’s 10-year holding period will be added to the client's holding period, making the asset Long-Term.

• Action Item: Ensure the client obtains the original vesting/exercise document from the US broker to substantiate the previous owner's cost basis in case of an income tax scrutiny notice.

India does not adopt the US stepped-up basis rule for inheritance. The relevant provision is Section 49(1) of the Income-tax Act, which determines cost of acquisition for inherited assets.

Under Section 49(1), when a person inherits an asset, the cost of acquisition in their hands is the cost to the previous owner , not the FMV at date of death. So the cost basis is the original ISO exercise price (or grant price, depending on how the shares were classified and when they were formally acquired by the deceased under US tax law), not the stepped-up basis that US estate law would apply.

A few additional points for this specific situation:

Holding period: Section 2(42A) counts the holding period from the date the deceased originally acquired the shares, not the date of inheritance. This matters for determining LTCG vs STCG classification.

Unlisted vs Listed: If the shares were unlisted at the time of sale, the rate is 20% with indexation under Section 112. If they have since listed on a recognized Indian or foreign exchange, the classification changes , verify the exchange recognition under Section 2(13A) of FEMA for this purpose.

Schedule FA: These are foreign assets. The inherited shares must be reported in Schedule FA (Foreign Assets) of ITR-2 or ITR-3 from the assessment year of acquisition, not just the year of sale.

FEMA compliance: Inheritance of foreign assets by an Indian resident is generally permitted under FEMA, but the resident must verify there are no FEMA reporting requirements under Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) or the ODI/OI framework if the shares carry voting rights above a threshold.

For the broader framework on unlisted shares capital gains, this [guide on LTCG and STCG on unlisted shares](https://taxgarden.in/blog/capital-gains-tax-unlisted-shares-india-ay-2026-27) covers the computation and ITR reporting.