Selling Indian Property as a U.S. Taxpayer: Key Tax Rules and Compliance Tips

 Owning property in India while being a U.S. taxpayer can be a rewarding investment—but when it comes time to sell, things can get complex. From capital gains tax in India to foreign income disclosure in the U.S., understanding the dual tax obligations is essential. This blog breaks down the key tax rules, filing requirements, and smart strategies for handling the sale of Indian property as a U.S. taxpayer.

Understanding Your Tax Status

As a U.S. citizen or green card holder, you're classified as a U.S. tax resident—meaning you're taxed on your global income, including capital gains from property sales in India. At the same time, India also taxes the income from property located within its borders.

This triggers the possibility of double taxation, which can be mitigated by using the Double Taxation Avoidance Agreement (DTAA) between the U.S. and India.

Taxes Applicable in India on Property Sale

1. Long-Term vs Short-Term Capital Gains

• If the property was held for more than 24 months, the profit is classified as Long-Term Capital Gain (LTCG) and taxed at 20% with indexation benefits.

• If sold within 24 months, it is treated as Short-Term Capital Gain (STCG) and taxed as per applicable income tax slabs.

2. TDS Deduction for NRIs

When a U.S. taxpayer sale of Indian property as a U.S. taxpayer

• The buyer must deduct TDS at 20% (plus surcharge and cess) for LTCG.

• For STCG, TDS is deducted at slab rates, often between 30%–35%.

• TDS is deposited using Form 27Q, and sellers receive Form 16A from the buyer.

Important: TDS is deducted on entire sale value, not just profit, which may lead to higher deductions initially.

Reducing TDS Burden with Lower/NIL Deduction Certificate

To avoid excessive TDS deduction:

• Apply for a Lower or NIL TDS Certificate under Section 197 of the Income Tax Act.

• File Form 13 online with income estimation and supporting documents.

• The certificate must be shared with the buyer before the sale to apply reduced TDS.

Tax Exemptions Available in India

As a U.S. taxpayer, you can still benefit from capital gains exemptions:

• Section 54: Reinvest LTCG in another residential property in India.

• Section 54EC: Invest up to ₹50 lakh in NHAI or REC capital gain bonds within 6 months.

• Capital Gains Account Scheme (CGAS): Temporarily park gains if reinvestment is pending.

U.S. Tax Implications of Property Sale

When you sell Indian property, the IRS expects you to:

1. Report the Sale and Gain in USD
   Convert both the purchase cost and sale proceeds using applicable foreign exchange rates (at acquisition and sale dates, respectively).

2. Pay Capital Gains Tax in the U.S.

   • For properties held more than a year, long-term capital gains tax applies (0%, 15%, or 20% depending on your income).

   • For properties held less than a year, short-term gains are taxed as ordinary income.

3. Claim Foreign Tax Credit

   • U.S. taxpayers can offset Indian taxes paid using Form 1116 (Foreign Tax Credit).

   • If done correctly, you’ll avoid being taxed twice on the same gain.

Filing and Disclosure Requirements in the U.S.

• Form 1040: Report capital gain as part of your annual income tax return.

• Form 8938 (FATCA): If total foreign assets exceed thresholds, you must disclose the property value.

• FBAR (FinCEN 114): If proceeds are deposited in Indian bank accounts exceeding $10,000, report them under FBAR.

Failure to file these forms may lead to steep IRS penalties—even if no additional tax is owed.

Other Points to Keep in Mind

• Repatriation of Funds: You can remit up to $1 million per financial year under RBI's Liberalized Remittance Scheme (LRS), after paying applicable taxes.

• Currency Exchange Gains: U.S. tax laws may also treat currency fluctuations as taxable events.

• Inheritance or Gift: If the property was inherited or gifted, your cost basis and tax treatment may differ.

Conclusion

Selling property in India as a U.S. taxpayer requires careful coordination between Indian tax laws and U.S. tax rules. While India will tax the transaction first, you must also report the gain in the U.S. and take advantage of foreign tax credits and DTAA relief to minimize your overall liability.

Handling tax compliance in both countries can be overwhelming. For personalized help with cross-border filings, capital gains calculation, and documentation for the sale of Indian property as a U.S. taxpayer, consult Dinesh Aarjav & Associates—your reliable partner for U.S.-India tax matters.