Tax on income from relinquishment of inherited property

Relinquishing your rights in exchange of monetary compensation cannot be said to be transfer in pursuance of gift. Hence the monetary compensation received by you shall be subjected to long term capital gains tax @ 20%. 

You can avoid paying capital gains tax if -

1) a new residential house is purchased within 1 year before or 2 years after the date of transfer or constructed within a period of 3 years after the date of transfer.

Quantum of Exemption

If cost of new residential house ≥ Capital gains, entire capital gains is exempt.

If cost of new residential house < Capital gains, capital gains to the extent of cost of new residential house is exempt

2) Amount received by such transfer is invested in Long-term specified asset means specified bonds, redeemable after 3 years, issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL).

Transfer of capital assets under gift or will or by succession or inheritance will not be subjected to capital gains. Any transfer of capital assets to close relatives (spouse,parent, sibling) is not subjected to capital gains.

Transaction of relinquishing rights without any consideration to your sibling, is not subjected to capital gains.

Though it is possible & legal to relinquish rights of your property to your sibling. But if you receive any monetary consideration in exchange of such relinquishment without showing it in your documents, the huge sum received cannot be deposited in your bank a/c or invested anywhere, as the source will be unknown.

Hence it is better to show the consideration received in your documents and invest the sum in avenues as i have said you earlier.

Thank you for your detailed respone, it has been of great help to me and clarified my queries

Also - if I were to receive 20Lakhs as consideration

To what amount will I have to invest to avoid Capital gains tax?

The cost of acquistion has to be deducted from the net consideration received by you. As you have acquired by inheritance, the cost of acquisition of the asset is the cost for which the previous owner  who acquired the asset as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

For example-- your mother had acquired the asset of 5 lacs and now the same property is equally divided to both the siblings. Then for each of you, cost of acquisition shall be 2.5 lacs. Add any amount that you both have spent for the improvement (say 2 lacs) . Then capital gains for you shall be  ((20 - (2.5+1))= 16.5 lacs. You either have to pay LTCG tax @ 20% i.e. 3.3 lacs or invest 16.5 lacs in avenue mentioned earlier.