Indian Real Estate Capital Gains for NRIs: Tax Guide

NRIs selling property in India face capital gains tax in both countries. Understanding the Indian tax rules — LTCG vs STCG, indexation, and exemptions — alongside U.S. reporting requirements is essential to minimize your total tax burden.

LTCG vs STCG on Indian Property for NRIs

India classifies property capital gains based on the holding period:

Note that the U.S. holding period for long-term treatment is more than 1 year, so a property held for 18 months is STCG in India but LTCG in the U.S.

Cost Inflation Index and Indexation Benefits

Prior to July 23, 2024, India allowed LTCG to be reduced using the Cost Inflation Index (CII). The indexed cost of acquisition was calculated as:

Indexed Cost = Original Cost x (CII of sale year / CII of purchase year)

Effective July 23, 2024 (Finance Act 2024): The indexation benefit has been removed for NRIs. LTCG on property is now taxed at a flat 12.5% without indexation, replacing the earlier 20% with indexation regime. For properties sold before July 23, 2024, the old 20% with indexation rules still apply.

The U.S. does not recognize Indian indexation in any case — your U.S. cost basis is the actual purchase price converted to USD on the acquisition date. With indexation removed in India as well, the Indian and U.S. capital gain calculations are now more closely aligned (though differences remain due to exchange rate treatment).

Section 54 and 54EC Exemptions for NRIs

India offers two key LTCG exemptions for property sellers:

• Section 54: Exemption if you reinvest the LTCG in purchasing or constructing a new residential property in India within 2 years (purchase) or 3 years (construction). The exemption is limited to one property and the gain amount.
• Section 54EC: Exemption for investing up to Rs 50 lakhs in specified capital gains bonds (NHAI, REC, PFC, IRFC) within 6 months of the sale date. The bonds have a 5-year lock-in period.

These exemptions reduce your Indian tax liability but have no effect on your U.S. tax. The full gain remains reportable on your U.S. return, and the reduced Indian tax means a smaller Foreign Tax Credit on Form 1116.

TDS Withholding on NRI Property Sales

The buyer is legally required to deduct TDS when purchasing property from an NRI under Section 195. The buyer must:

• Obtain a TAN (Tax Deduction Account Number)
• Deduct TDS at the applicable rate (12.5% LTCG / 30% STCG)
• Deposit the TDS with the Indian government within 7 days
• Issue Form 16A (TDS certificate) to the NRI seller within 15 days

If the TDS exceeds your actual Indian tax liability, file an Indian income tax return to claim a refund. The TDS amount (whether refunded in India or not) is the basis for your FTC claim on your U.S. return.

Reporting on US Tax Return: Schedule D and Form 8949

Report the property sale on Form 8949 (Part I for short-term, Part II for long-term) and the totals flow to Schedule D:

• Description: "Residential property in [City], India"
• Date acquired: Original purchase date
• Date sold: Sale date per the registered sale deed
• Cost basis: Purchase price in USD (exchange rate on purchase date)
• Sale price: Sale proceeds in USD (exchange rate on sale date)

Inherited Property: Special Tax Rules for NRIs

If you inherited Indian property from a deceased relative, the tax treatment differs between India and the U.S.:

• U.S. cost basis: Stepped-up to the fair market value on the date of death. This means the gain is calculated from the FMV at death, not the original purchase price.
• Indian cost basis: The cost to the previous owner (with indexation from the year the previous owner acquired it). No stepped-up basis in India.
• Holding period: In India, the holding period includes the time the previous owner held the property. In the U.S., inherited property is automatically considered long-term regardless of actual holding period.

The stepped-up basis in the U.S. often results in a significantly lower U.S. capital gain compared to the Indian gain, especially for properties held for decades.