Selling Indian property: capital gains, TDS, repatriation and the Section 54 problem

Property is usually the largest Indian transaction an NRI has, and the one with the highest cost of a mistake. Plan before signing the sale agreement.

Computing the US gain

The US gain is: sale price in dollars, minus the cost in dollars, minus improvements, minus selling costs.

• Proceeds are converted at the spot rate on the sale date.
• The cost of purchase, and each later improvement, is converted at the spot rate on the date it was paid.
• Depreciation (allowed or allowable) on a rental property reduces the basis.

Because the rupee has fallen against the dollar over most periods, a property that doubled in rupees might show a much smaller gain in dollars, and in a long hold, sometimes none. The currency movement is part of the gain or loss; it is not reported separately.

Gains on property held more than one year are long-term, taxed at 0, 15 or 20%, plus the 3.8% net investment income tax at higher incomes. The part of the gain attributable to depreciation is taxed at up to 25% (unrecaptured Section 1250 gain).

What India does

For NRIs, long-term gains on land or buildings (held 24 months or more) are taxed at 12.5% without indexation, plus surcharge and cess, for sales on or after 23 July 2024. The option to pay 20% with indexation on property bought before that date is limited to resident individuals and HUFs, so NRIs do not get it (Income Tax Department guidance on section 112). Short-term gains are taxed at slab rates. The buyer must deduct TDS (Section 195 of the old Act, Section 393(2) of the 2025 Act). The law ties it to the gain, but in practice buyers and banks deduct on the whole sale price, which is often far more than the actual tax. To limit it, apply for a lower deduction certificate before the sale (Form 13 under the old rules, Form 128 under the 2025 Act's rules). Without one, expect deduction at the full rate on the full price. Section numbers and forms changed with the Income-tax Act 2025 from 1 April 2026, so confirm the current procedure.

Repatriating the money

Sale proceeds credited to an NRO account can be remitted abroad up to US$1 million per financial year, with Form 15CA (a self-declaration) and, for payments above Rs 5 lakh in the year, Form 15CB (a CA's certificate), plus proof of the tax paid. Under the 2026 Income-tax Rules these are Forms 145 and 146. Plan this before the sale, as the bank will ask for the certificates.

The Section 54 trap

India lets you avoid tax on a long-term gain by buying another house (Section 54) or investing in specified bonds (Section 54EC), within time limits. The US has no such rule. If you reinvest, India taxes nothing, the US taxes the whole gain, and because India collected no tax there is no foreign tax credit to offset it. Reinvesting only to save Indian tax can therefore lead to a net tax cost.

Foreign tax credit and mismatch

If India does tax the gain, the tax is creditable on Form 1116 against the US tax on the same gain, but the rates and the gain differ because of the exchange rate treatment and depreciation, so a part of the Indian tax can go unused. Unused credit carries back one year and forward ten, in the same category.

The home sale exclusion

If you lived in the Indian house as your main home for two of the last five years, the US allows you to exclude up to $250,000 ($500,000 joint) of gain. Few US residents qualify, but returning NRIs sometimes do.

Steps before a sale

1. Gather the cost documents and the exchange rate for each payment date.
2. Apply for the lower deduction certificate (Form 13, now Form 128).
3. Estimate US tax and make an estimated payment (withholding).
4. Plan the remittance and certificates.
5. Report on Form 8949 and Schedule D, and file the Indian return.