Selling or Inheriting Property in India as a US Resident: The Tax on Both Sides

The old flat in Pune has finally sold, or your father's house in Chandigarh has come to you and you have decided to sell it rather than manage it from New Jersey. The Indian side of what happens next is well mapped: the buyer withholds tax, a chartered accountant certifies the proceeds, the money leaves through your NRO account inside the USD 1 million window. What is not well mapped — and what no Indian tax portal will tell you — is what the IRS does when that money lands. The answer is that the United States taxes the same sale a second time, on a different number, under different rules, and the two systems disagree with each other in ways that decide whether you owe a little or a lot.

This guide walks the US half of the journey in the order the events actually happen, and hands you to the India-side guides at each step. It assumes you are a US person for tax purposes — a citizen, a green card holder, or a resident under the substantial presence test — because that is the condition that triggers everything below.

Two countries, two different gains

India taxes the sale because the property is in India. The United States taxes it because you are a US person, and a US person owes tax on income from everywhere, as the IRS states plainly. The India–US treaty does not rescue you here: Article 13 of the treaty text lets each country tax capital gains under its own domestic law, so both claims stand and the only relief is a credit, which comes later.

What surprises people is that the two countries are not taxing the same gain. India computes its gain in rupees, from the Indian cost of acquisition. The IRS computes its gain in dollars, from a US basis that may be a completely different number — and the dollar figure has to be built by translating two rupee amounts at two different exchange rates. Per the IRS rule on foreign currency, each transaction is translated at the spot rate on its own date: the purchase price at the rate when you bought, the sale price at the rate when you sold. The rupee's long slide against the dollar is therefore baked into your US gain, which is one reason a flat that tripled in rupees may have barely doubled in dollars.

Hold that thought, because for inherited property the gap between the two gains becomes the whole story.

Your US basis depends on how the property came to you

The US basis — the number you subtract from the sale price — is set by the route the property took into your hands, and the three routes behave very differently.

You bought it. Your basis is what you paid, translated to dollars at the exchange rate on the purchase date, plus the dollar value of capital improvements, less any depreciation you claimed if you rented it out and reported the rent on your US return. The IRS's Publication 551 is the reference for all of this. The holding period runs from the purchase date, and after one year the gain is long-term.

You inherited it. This is the generous route, and it is the one most NRIs do not know applies to them. Under Section 1014 of the Internal Revenue Code, property acquired from a decedent takes a basis equal to its fair market value on the date of death — the "stepped-up basis". NRIs often assume this is only for American estates, but the IRS addressed exactly the NRI situation in Revenue Ruling 84-139: foreign real property inherited by a US person from a nonresident alien receives the step-up even though the property was never part of a US-taxable estate. Your basis is the house's value in dollars on the day your parent died, not what they paid decades ago. Inherited property is also treated as held long-term from day one, regardless of how quickly you sell.

The practical consequence: if you sell within a year or two of inheriting, your US gain is usually small — the difference between the date-of-death value and the sale price, plus whatever the rupee did in between. Get a professional valuation as of the date of death and keep it; the step-up is only as defensible as the number behind it.

It was gifted to you while the giver was alive. Here the generosity disappears. A gift carries the giver's basis across to you (Section 1015), so if your mother signs the flat over to you before she dies, you inherit her 1995 cost rather than today's value, and your US gain is the full appreciation since then. A living gift of Indian property from a parent to an NRI child is common because India taxes neither the gift nor its receipt between relatives, but it quietly forfeits the US step-up. If a transfer is being planned rather than forced, that difference deserves a conversation before the deed is signed.

India's basis rules point the other way

India does not step up anything. For inherited property, the Income-tax Act carries the previous owner's cost across to you, and counts the previous owner's holding period as yours. Where the previous owner bought before 1 April 2001, the fair market value on that date may be used as the cost instead — which is why a registered valuer's report for 2001 is the single most valuable document in an inherited-property sale in India.

For transfers on or after 23 July 2024, a non-resident's long-term gain on immovable property is taxed at 12.5 percent without indexation, plus surcharge and cess, once the combined holding period exceeds 24 months. The mechanics of how the buyer withholds this — on the entire sale price, not the gain, unless you obtain a lower-deduction certificate first — are in our guide to TDS when the seller is an NRI. India also offers reinvestment exemptions, principally Sections 54 and 54EC, that can reduce or eliminate the Indian tax if the proceeds go into another Indian residential property or into specified bonds; nothing in the US code recognises those exemptions, so the IRS taxes the gain regardless of where you reinvest.

Now put the two basis rules side by side. For inherited property, India measures the gain from a 2001 value and the IRS measures it from the date of death. The Indian gain is large; the US gain is small. That asymmetry is not a problem in itself — it is the foreign tax credit that turns it into one.

The foreign tax credit, and why it often comes up short

The US relieves double taxation through the foreign tax credit: Indian income tax you paid on the sale reduces your US tax, dollar for dollar, claimed on Form 1116. Three limits shape how much of it you actually get.

The credit cannot exceed the US tax on the same income. Form 1116 caps the credit at the share of your US tax that is attributable to foreign-source income in the relevant category — for a property sale, the passive category. If India charged you $30,000 on a gain the IRS values at $12,000, your credit is limited to the US tax on $12,000, which might be $2,000. The remaining $28,000 of Indian tax is not refunded by anyone. Per the Form 1116 instructions, unused credit can be carried back one year and forward ten, but it can only ever be used against US tax on other passive-category foreign income — NRO interest, Indian dividends, rent from another Indian flat. If you have none, the excess simply expires.

This is the inherited-property trap in one sentence: the step-up that shrinks your US gain also shrinks the credit you can use, so a large Indian tax bill on an inherited sale is often a real, final cost rather than something the credit washes away.

The credit is for tax actually owed, not tax withheld. Your buyer withholds TDS on the full sale consideration, which is almost always more than your eventual Indian liability. The credit is for the final Indian tax as settled on your Indian return, not the gross withholding. If you claim the credit on the withheld amount and later receive an Indian refund, US law requires you to notify the IRS and recompute the credit — a foreign tax redetermination under Section 905(c) — rather than keep the difference. File the Indian return, settle the true figure, and credit that.

The years do not line up. India's financial year runs April to March; the US taxes on the calendar year. Form 1116 lets you take the credit in the year the tax was paid (the default for individuals) or elect to take it in the year it accrued; the election, once made, is binding for future years. A sale in February means TDS withheld in one US calendar year and an Indian return filed, with the final liability settled, in the next. Decide which method you are on before the first Form 1116, and keep every TDS certificate (Form 16A) and the Indian assessment with your US records.

A worked example: the same flat, inherited versus bought

Numbers are illustrative and rounded; exchange rates are the approximate spot rates on the dates described.

Inherited. Your father bought a Pune flat in 1998 for ₹18 lakh. He died in March 2024, when the flat was worth ₹1.9 crore — about $229,000 at ₹83 to the dollar. You sell it in March 2026 for ₹2.1 crore, about $241,000 at ₹87.

• India: cost of acquisition is the 1 April 2001 fair market value — say ₹30 lakh on a valuer's report. Long-term gain ₹1.8 crore; tax at 12.5 percent plus surcharge and cess, roughly ₹27 lakh, about $31,000. Your buyer withheld on the full ₹2.1 crore, so you have paid more than this at the table and will recover the excess through your Indian return.
• United States: basis is the date-of-death value, $229,000. Gain $12,000, long-term. US tax at 15 percent, about $1,800; if your income is above the net investment income tax threshold of $200,000 ($250,000 married filing jointly), add 3.8 percent, bringing it to roughly $2,300.
• Credit: capped at the US tax on the $12,000, so the entire US bill is wiped out — and about $28,000 of Indian tax becomes an unused credit, usable only against future US tax on passive Indian income, and gone after ten years.

Bought. Same flat, but you bought it yourself in 2010 for ₹60 lakh, about $130,000 at ₹46 to the dollar, and sell it in March 2026 for the same ₹2.1 crore.

• India: gain ₹1.5 crore; tax roughly ₹22 lakh, about $25,000.
• United States: basis $130,000; gain $111,000. Tax at 15 percent about $16,700, plus the 3.8 percent if applicable, around $20,900 at most.
• Credit: the $25,000 of Indian tax exceeds the US tax on the gain, so the US bill on the sale is fully credited and a few thousand dollars carry forward. Here the credit does its job.

The lesson is not that buying is better than inheriting — the inherited flat produced far more after-tax money overall. It is that the Indian tax on an inherited sale is, for most NRIs, a cost the US credit will not recover, and the planning that matters is on the Indian side: a defensible 2001 valuation, a lower-deduction certificate so you are not over-withheld for a year, and a hard look at whether a Section 54EC bond investment reduces the Indian bill enough to be worth the lock-in.

Form 3520: the form with no tax and a very large penalty

If the property came to you by inheritance or gift from a parent who was not a US person, the United States has one more interest in the transaction, and it arose before you ever thought about selling. Under the Form 3520 instructions, a US person who receives gifts or bequests from a nonresident alien individual or a foreign estate totalling more than $100,000 in a year must report them on Form 3520. No tax is due — the form is purely informational — but the penalty for not filing is 5 percent of the amount for each month the failure continues, up to 25 percent. On a ₹1.9 crore house, that is the better part of $57,000 for a form nobody told you about.

Two details catch NRIs. The threshold is tested on the value of what you received, so a house counts even though no money moved. And the form is due with the return for the year you received the property — the year of death or of the gift deed — not the year you sell. If you inherited in 2024 and are reading this in 2026 having filed nothing, you are late, and the right move is a late Form 3520 with a reasonable-cause statement, filed now, before any IRS contact. The instructions say penalties do not apply where there is reasonable cause and not wilful neglect; a well-documented, voluntary late filing is where that argument is strongest.

The money sitting in India is itself reportable

Between the sale and the wire, the proceeds sit in your NRO account — sometimes for months, while the chartered accountant's certificate and the bank's compliance review run their course. Two disclosure obligations attach to that balance.

The FBAR, filed with FinCEN rather than the IRS, is triggered once the aggregate value of your foreign accounts exceeds $10,000 at any point in the year, per FinCEN's instructions. A ₹2 crore sale clears that by a factor of two hundred. Our FBAR guide covers the mechanics; the point here is that the year of a property sale is the year your NRO balance peaks, and the FBAR asks for the maximum balance.

Form 8938, filed with your return, has higher thresholds for people living in the United States — more than $50,000 on the last day of the year or $75,000 at any time for an unmarried filer, and $100,000 or $150,000 for a married couple filing jointly, per the IRS summary of FATCA reporting. The property itself was never reportable on Form 8938 — directly held real estate is excluded — but the cash from selling it is, the moment it reaches a bank account.

Neither form creates tax. Both carry penalties that dwarf the tax on the sale. File them in the year of the sale even if your Indian balances have never crossed the thresholds before.

Three things that occasionally change the picture

It was your home. If the property was your principal residence for at least two of the five years before the sale, Section 121 excludes up to $250,000 of gain ($500,000 married filing jointly) from US tax, per IRS Topic 701. The exclusion applies to a home anywhere in the world. It rarely helps an NRI who left India more than three years ago, but a recent mover who sells the Bengaluru flat they lived in until 2024 may qualify in full.

You rented it out and depreciated it. If you reported the Indian rent on Schedule E and claimed depreciation — foreign residential property is depreciated straight-line over 30 years under the alternative depreciation system for property placed in service after 2017 — that depreciation reduced your basis, and the part of the gain attributable to it is taxed at up to 25 percent rather than the capital-gains rate, as IRS Topic 409 explains. If you reported the rent but never claimed depreciation, the IRS treats you as though you had; have a professional compute the "allowed or allowable" adjustment before you file.

You live in a state that ignores foreign tax. The federal credit does nothing for state tax. California is the sharpest case: its credit for taxes paid elsewhere covers other US states and possessions only, so a California resident pays full state tax on the US gain with no relief for the Indian tax at all, and California taxes capital gains as ordinary income. Several other states follow the same pattern. Factor the state bill in before you assume the credit has made the sale tax-neutral.

The order of operations

Run this in sequence, and most of the pain disappears.

1. Before listing: if inherited, obtain a professional valuation as of the date of death (your US basis) and a registered valuer's report for 1 April 2001 if the original purchase predates it (your Indian cost). If a gift is being proposed instead of a bequest, pause and read the basis section again.
2. When the price is agreed: apply for the lower-deduction certificate so the buyer withholds on the gain, not the consideration. It takes weeks, so start immediately.
3. At completion: confirm the buyer has a TAN and deposits the TDS; collect Form 16A and check it appears in your Form 26AS. Proceeds go into your NRO account.
4. After the sale, India side: file the Indian return for the year, settle the true liability, claim any refund of over-withheld TDS, then engage a chartered accountant for Forms 15CA and 15CB — Forms 145 and 146 under the 2025 Act's numbering — and repatriate within the USD 1 million window.
5. US return for the year of sale: report the gain on Form 8949 and Schedule D, in dollars, with both translations documented; claim the credit on Form 1116 for the final Indian tax; file Form 8938 if the thresholds are met.
6. Alongside it: the FBAR for the year, showing the NRO peak; and Form 3520 for the year you received the property if it was inherited or gifted and worth more than $100,000 — late, with a reasonable-cause statement, if that year has already passed.
7. State return: check whether your state gives any credit for the Indian tax before assuming the federal result carries through.

A sale handled in this order produces one Indian tax, one US tax largely or wholly offset by credit, and three information forms filed on time. Handled in the wrong order — withholding on the full price, no Indian return, no valuation, a Form 3520 discovered three years late — it produces the same tax plus a year of trapped money and penalties that can exceed the tax itself.

Frequently asked questions

I inherited a flat in India from my father. Do I pay US tax on the inheritance?

No tax, but a form. The United States does not tax the recipient of an inheritance, and India abolished estate duty in 1985, so nothing is due on the transfer itself in either country. What the US requires is Form 3520 if the value received from a nonresident alien or foreign estate exceeds $100,000 in a year, due with your return for the year you received the property. The penalty for missing it is 5 percent of the value per month up to 25 percent, so file it even if the deadline has passed.

Does the stepped-up basis really apply to a house in India?

Yes. Revenue Ruling 84-139 addressed foreign real property inherited by a US person from a nonresident alien and confirmed the Section 1014 step-up applies even though the property was never in a US-taxable estate. Your US basis is the fair market value on the date of death, in dollars at that day's exchange rate, and the holding period is automatically long-term. Get a dated professional valuation to support the number.

India already taxed the sale. Why do I owe anything in the US?

Because the two countries measure different gains and the credit only reaches as far as the US tax on the foreign-source gain. If the Indian gain is larger than the US gain — the usual case for inherited property, since India uses the previous owner's cost and the IRS uses the date-of-death value — the credit covers all the US tax but leaves part of the Indian tax uncredited. If the US gain is larger, you owe the US the difference after credit. Either way, the credit is for the final Indian liability on your Indian return, not the TDS the buyer withheld.

Can I use the leftover foreign tax credit against my salary?

No. Form 1116 keeps the credit within its category, and tax on a property sale falls in the passive category, so the unused amount can only offset US tax on other passive foreign-source income — NRO interest, Indian dividends, rent from Indian property. It carries back one year and forward ten; if you have no such income in that window, it expires unused.

Do I need to report the NRO account holding the sale proceeds?

Almost certainly, twice. The FBAR applies once your foreign accounts aggregate more than $10,000 at any time in the year, and it asks for the maximum balance, which in a sale year is the sale proceeds. Form 8938 applies to US residents above $50,000 at year-end or $75,000 at any time ($100,000 and $150,000 for joint filers). The property was not reportable while you held it; the cash from selling it is, from the day it lands in the account.