Selling Property in India as a US Resident: How the IRS Taxes It
If you are a US citizen or green-card holder, the IRS taxes your gain on an Indian flat even though India taxes it first. You report the sale in dollars on Form 8949 and Schedule D, then claim a foreign tax credit on Form 1116 for the Indian tax, capped at the US tax on that gain. The 3.8% net investment income tax cannot be offset.
Key takeaways
- India has the first right to tax gains on Indian land and buildings under the India-US tax treaty. The US taxes you as well, then credits the Indian tax through Form 1116.
- The US gain is worked out in dollars: purchase price at the exchange rate on the purchase date, sale price at the rate on the sale date. A falling rupee can turn a large rupee gain into a small dollar gain, or a dollar loss.
- Only the Indian tax you actually owe is creditable, not the larger TDS the buyer withheld on the whole price. Any Indian refund cuts the credit.
- On 31 August 2026 the Federal Circuit ruled in Bruyea and Christensen that foreign tax credits cannot reduce the 3.8% NIIT.
- If the flat was your main home for two of the last five years, the section 121 exclusion (USD 250,000, or USD 500,000 for a joint return) can apply to an Indian home too.
Who gets to tax the sale first
Under the India-US treaty, income from immovable property can be taxed where the property is, so India taxes the gain on your Pune flat whatever your residence. As a non-resident seller you pay 12.5% on a long-term gain (held more than 24 months) with no indexation, plus surcharge and 4% cess, an effective rate of roughly 13% to 15%. The buyer withholds TDS on the whole sale price unless you obtain a lower-deduction certificate; the Indian mechanics are in our guide for an NRI selling property in India.
The United States taxes citizens and residents on worldwide income, so the same sale appears on your Form 1040. The treaty's relief article, backed by the Internal Revenue Code, lets you credit the Indian tax against the US tax on that income. What you end up paying overall is roughly the higher of the two countries' taxes on the gain, not both added together.
Working out the gain in dollars
The IRS does not care about your rupee gain. It wants three dollar figures:
- Cost basis: the rupee purchase price plus stamp duty, registration and improvements, each converted at the spot rate on the day it was paid. If you inherited the flat, the basis is its market value at the date of death, converted at that day's rate.
- Amount realised: the rupee sale price less brokerage and other selling costs, converted at the rate on the sale date.
- Depreciation, if the flat was let: a foreign residential rental placed in service after 2017 is depreciated over 30 years, and that depreciation, whether you claimed it or not, is taxed on sale at up to 25% as unrecaptured section 1250 gain.
Because the rupee has weakened for years (the 2016 average was about Rs 67.2 to the dollar; late September 2026 rates were around Rs 96), the dollar gain is usually much smaller than the rupee gain.
| Item | India computes | US computes |
|---|---|---|
| Currency | Rupees | Dollars, at the rate on each transaction date |
| Long-term threshold | More than 24 months | More than 12 months |
| Long-term rate | 12.5% plus surcharge and 4% cess (non-resident) | 0%, 15% or 20%, plus 3.8% NIIT above USD 200,000 (single) or USD 250,000 (joint) income |
| 2026 thresholds for the 15% rate | Not applicable | Above USD 49,450 (single) or USD 98,900 (joint) of taxable income; 20% above USD 545,500 or USD 613,700 |
| Inherited property basis | Previous owner's cost and holding period | Market value at date of death |
| Main-home relief | Reinvestment exemptions | Section 121 exclusion (two of five years' use) |
| Tax year | 1 April to 31 March | Calendar year |
Worked example: a flat bought in 2016, sold in 2026
You bought a flat for Rs 67 lakh in 2016, at about Rs 67 to the dollar: a USD 100,000 basis. You sell it in September 2026 for Rs 1.2 crore at Rs 96: USD 125,000. Ignore costs to keep the arithmetic clear.
- India: the rupee gain is Rs 53 lakh. At 12.5% plus a 10% surcharge and 4% cess (14.3%), the tax is Rs 7,57,900, about USD 7,895 at Rs 96.
- US: the dollar gain is USD 25,000. As a single filer with USD 150,000 of salary, you are in the 15% band: USD 3,750. Your income, at USD 175,000, is below the USD 200,000 NIIT threshold.
- Credit: the credit is capped at roughly the US tax on the foreign income, USD 3,750, so you owe the IRS nothing on the sale. The unused USD 4,145 of Indian tax can be carried back one year or forward ten, but only against future foreign-source passive income.
Now suppose the same flat sells for Rs 90 lakh. India still sees a Rs 23 lakh gain and taxes it. In dollars you receive USD 93,750, a USD 6,250 loss. If it was a personal-use home, that loss is not deductible; if it was a rental, it is a capital loss. Either way the Indian tax has nothing to credit against and is usually a pure cost.
Timing: TDS, refunds and two different tax years
The buyer withholds TDS on the whole price, not the gain. On a Rs 1.2 crore sale that is roughly 14% to 15%, about Rs 17.2 lakh to Rs 17.9 lakh depending on the surcharge the buyer applies, against a real liability of Rs 7.58 lakh. You recover the difference by filing an Indian return, and India's 2026-27 return is not due until well after the US filing season.
US rules follow the real liability, not the withholding. Treasury regulations say an amount is not a creditable tax to the extent it is reasonably certain to be refunded, whether or not you claim the refund. So:
- Claim only your estimated final Indian tax on Form 1116, not the TDS figure in Form 26AS.
- Claim it for the US year in which you report the gain, even though the Indian year ends on 31 March.
- If the final Indian assessment differs, that is a foreign tax redetermination: amend with Form 1040-X.
- Consider an extension of your US return if the Indian figures are not settled by April.
The better answer is to avoid the over-withholding in the first place with a lower-deduction certificate from the Indian tax department before the sale; the buyer's side of that is in our guide to buying property from an NRI.
The currency and loan traps
If you had a rupee home loan on the flat, repaying it creates its own foreign currency result. For a rental, section 988 treats a gain on repaying a rupee loan as ordinary income, separate from the property gain. For a personal home the loan is not a section 988 transaction, but a currency gain on repayment is still taxable while a loss is non-deductible. Because the rupee has fallen, repaying a rupee loan often produces a dollar gain.
Bringing the money home adds nothing to US tax, but India limits repatriation from an NRO account to USD 1 million per financial year, with Forms 15CA and 15CB.
Reporting that sits alongside the sale
The sale proceeds sitting in an Indian bank account bring the usual disclosures: FBAR once your foreign accounts together exceed USD 10,000 at any time in the year, Form 8938 above its higher thresholds, and Schedule E for any rent received before the sale. We cover these under "What the IRS wants" in our guide to buying property in Dubai from the USA; the rules are the same for India. An inheritance above USD 100,000 from a non-US person also goes on Form 3520, an information return with no tax due.
When this gets expensive
- High earners: above the NIIT thresholds, 3.8% of the dollar gain is owed with no credit, now that the Federal Circuit has closed the treaty argument.
- Long-held rentals: depreciation recapture at up to 25% can exceed the Indian tax on that slice.
- Holdings of 12 to 24 months: India taxes the gain at slab rates as short-term, while the US may already treat it as long-term at 15%, so part of the Indian tax goes uncredited.
- Dollar losses: as above, Indian tax on a rupee gain can be pure cost.
Frequently asked questions
Do I pay tax twice when I sell my Indian flat as a US citizen?
Usually not in full. India taxes the rupee gain first, and you claim a foreign tax credit on Form 1116 for that Indian tax against the US tax on the same dollar gain. The credit is capped at the US tax on the gain, and it cannot reduce the 3.8% net investment income tax if your income is above the threshold.
Which exchange rate do I use for the IRS?
The spot rate on each transaction date: the purchase date for the cost, the dates you paid for improvements, and the sale date for the proceeds. Do not use the IRS yearly average rate for these one-off transactions; tax advisers stress that property purchases and sales need the rate on the actual day.
Can I claim the Indian TDS as a foreign tax credit?
Only the part that is your real Indian liability. If the buyer withheld Rs 17 lakh but your return shows Rs 7.6 lakh of tax, the Rs 9.4 lakh or so you can get refunded is not creditable, whether or not you ask for the refund. If the final Indian figure changes later, amend your US return.
Does the section 121 home-sale exclusion work for a flat in India?
Yes, if it was your main home for at least two of the five years before the sale and you meet the other conditions. The exclusion covers up to USD 250,000 of gain, or USD 500,000 on a joint return. It does not shelter depreciation claimed on any period the flat was let.
I inherited the flat. What is my US cost?
Its fair market value on the date of death, converted to dollars at that day's rate. India instead uses the previous owner's cost, so the two gains can differ sharply. Keep a valuation report from around the date of death; it is the evidence the IRS will want for that stepped-up figure.
If you are planning a sale from the US, Realty Hunting can help with pricing, buyers and timing, so the tax work starts from a realistic number.
Sources
The figures and rules in this post were researched against these sources. Government and regulator sources are listed first. Rates, fees and rules change; check the current figure with the authority before you pay or sign.
