An NRI in New Jersey inherits a flat in Hyderabad from a late parent and decides to sell. The sale itself goes smoothly. Then the tax questions arrive, and they arrive from two directions at once. India wants tax on the gain. The United States, which taxes its citizens and residents on their worldwide income, wants to see the same sale on next year’s return. The two systems do not agree on what the gain even is.
If you are a US citizen, a Green Card holder, or a US tax resident who happens to also be an OCI, this is your situation whenever you sell property in India. The good news is that you will almost certainly not be taxed twice on the same money. The bad news is that getting there requires answering to both tax systems in the right order, and the place people lose money is the gap between what India taxes and what the US taxes.
Two tax systems, one sale
Start with the principle, because it removes half the fear. You are not choosing between India and the US. You report the sale in both. India taxes it as the source country, where the property sits. The US taxes it because it taxes Americans on income earned anywhere in the world. The India-US tax treaty and the Foreign Tax Credit then make sure the tax you pay in India is credited against your US tax on the same gain, so the combined bill is not double.
That is the frame. Now the two sides, because each computes the gain differently, and the difference is where the real planning lives.
The India side
India does not tax you for inheriting. The tax event is the sale, and the gain is long-term if the property, counting the time the previous owner held it, has been held more than 24 months, which for inherited family property it almost always has.
| India, on the sale | What applies |
|---|---|
| Cost basis | The original owner’s cost, or the fair market value as on 1 April 2001 for older property |
| Long-term rate | 12.5% without indexation, or 20% with indexation for property bought before 23 July 2024 |
| TDS at sale | The buyer must deduct tax at source on the sale consideration under Section 195, not on the gain |
| Reducing the TDS | A lower deduction certificate applied for before the sale, so cash is not locked up |
| Getting the money out | Up to USD 1 million per financial year from your NRO account, via Form 15CA and a CA’s Form 15CB |
The part that catches US sellers is the TDS. Because you are a non-resident, the buyer deducts against the whole sale price, not your gain, and that deduction can be far larger than your actual Indian tax. Applying for a lower deduction certificate in advance is the single most valuable step on the India side. Skip it and you wait a year to refund money you never owed.
The US side
Now the same sale, seen from the US. You report it on Schedule D of your US return, and here inheritance works dramatically in your favour.
| US, on the same sale | What applies |
|---|---|
| Cost basis (inherited) | Stepped up to the fair market value on the date the previous owner died, under IRC section 1014 |
| Holding period | Treated as long-term regardless of how long you held it |
| Long-term rate | 0, 15, or 20% depending on your income |
| Extra layer | A 3.8% Net Investment Income Tax if your income clears USD 200,000 single or USD 250,000 married |
| Credit for Indian tax | The Foreign Tax Credit on Form 1116, offsetting the Indian tax you paid |
| Reporting the account | FBAR and possibly FATCA on the Indian account the proceeds sit in |
The stepped-up basis is the quiet giant. For US tax, your cost is not what your grandfather paid decades ago. It is the property’s value on the day you inherited it. So if you inherit a flat worth two crore and sell it soon after for two crore and a bit, your US gain is tiny, and it applies to foreign property inherited from a non-US parent, not just US assets.
The trap almost everyone misses
Put the two tables side by side and the problem jumps out. India measures your gain from the original owner’s ancient cost, so the Indian gain on a long-held family property is enormous. The US measures the same gain from a stepped-up basis at the date of death, so the US gain is small.
That mismatch is usually good news, but not the way people expect. You will often pay a large tax in India and a small tax in the US. When you claim the Foreign Tax Credit, you can only use as much Indian credit as you have US tax to offset. If your US tax on the sale is small, a chunk of your Indian tax credit goes unused that year. It can generally carry back one year or forward ten, but it is not a guarantee you recover all of it. The lesson is not to assume the credit erases the Indian tax. Plan the India side, especially the lower deduction certificate and any Section 54 reinvestment relief, as if the US credit were not there to save you.
There is a second wrinkle for owned, rather than inherited, property. You get no step-up. Your US cost basis is what you actually paid, converted to dollars at the exchange rate on the day you bought, and your sale price is converted at the rate on the day you sold. A rupee that weakened against the dollar over the years can shrink your real gain, or a rupee that strengthened can manufacture a US gain even where the rupee price barely moved. The US does not care about rupees. It taxes the dollar result.
Doing it from the US, in the right order
None of this requires you to fly down, but it does require sequence. A registered Power of Attorney lets a trusted person complete the India registration on your behalf. Keep it narrow and specific to the sale, and remember that the sale must still end in a properly registered sale deed, not a shortcut.
The order that works: get your India documents and title chain in order first, apply for the lower deduction certificate before you agree the sale, complete the sale and pay the Indian tax, repatriate the proceeds within the USD 1 million annual window using Form 15CA and 15CB, then file your US return claiming the Foreign Tax Credit and, if your accounts cross the thresholds, your FBAR and FATCA forms. Do it in that order and both systems line up. Do it out of order, sell before the deduction certificate, or forget the FBAR, and you create work and cost that were entirely avoidable.
What you should do
- Decide first whether you are even a US taxpayer on this sale. US citizens and Green Card holders always are. An OCI who is not a US person is not, and only files in India.
- Apply for the India lower deduction certificate before you sell. This is the biggest single cash-flow saver, and it is a before-the-sale step, not an after.
- Get the date-of-death value documented for inherited property. Your stepped-up US basis depends on it, so a defensible valuation as at the date of death is worth arranging early.
- Do not assume the Foreign Tax Credit cancels the Indian tax. With a stepped-up basis your US tax is often the smaller number, which can leave Indian credit unused. Model both before you sell.
- Line up the paperwork for both countries. India needs the title chain, EC, and 15CA/15CB. The US needs Schedule D, Form 1116, and possibly FBAR and Form 8938. Missing an information form is where penalties, not tax, bite.
Selling an India property from America is not one tax problem. It is two, stacked, computed on different bases and filed in different months. Handle each on its own terms and in the right order, and the treaty does exactly what it was written to do. This is a general guide, not tax advice, and a sale of any size is worth running past a cross-border tax professional who works both sides.
