India does not tax inheritance. It taxes the sale. Estate duty was abolished in 1985, so nothing is owed when the flat passes to you. The tax is due when you sell, and it is calculated from a price that you never paid.
The title work and the wire home are in selling an inherited property in India.
1. Your cost basis in India
Your cost of acquisition is whatever the previous owner paid. Inheritance is not a transfer for capital gains purposes. The tax falls on your sale. The gain is measured from your father's price rather than from the value of what you received.
The previous owner's holding period is added to yours. An inherited property is therefore almost always long-term when sold, even if you inherited it last month. This is the one part of the carryover rule that helps you, because the 12.5% rate applies instead of slab rates.
If the property was bought before April 1, 2001, you may use the fair market value on that date instead of the original price. The option still applies under the 2025 Act and is available to non-residents. On a flat bought in 1998 for ₹8,00,000, the 2001 valuation is usually worth several lakh in tax. You will need a registered valuer's report, and the assessing officer will ask to see it.
You do not get indexation. Section 197(3) limits the indexed calculation to resident individuals and HUFs. You pay 12.5% on an unindexed gain, measured from a price paid decades ago.
2. Your cost basis in the United States
Under Section 1014, property inherited from someone who has died takes a basis equal to its fair market value on the date of death. The rule applies to foreign property inherited from a foreign parent in the same way it applies to a house in New Jersey. Your holding period is automatically long-term.
India measures your gain from 1998. The United States measures it from March 2024. The two figures differ in size and in direction. India records a gain, and the IRS records a loss.
Two cost bases, one flat: a father buys in 1998, dies in 2024, the heir sells in 2026
| Same sale, two systems | India | United States |
|---|---|---|
| Rule applied | Cost carries over from the deceased | Basis steps up to date-of-death value |
| Statutory basis | Income Tax Act, 2025 | IRC Section 1014 |
| Cost used | ₹12,00,000 (FMV as at Apr 1, 2001) | ₹1,60,00,000 at ₹83 = $192,771 |
| Sale proceeds | ₹1,80,00,000 | ₹1,80,00,000 at ₹96 = $187,500 |
| Result | Gain of ₹1,68,00,000 | Loss of $5,271 |
| Tax | ₹25,11,600 (about $26,160) | None. There is no gain to tax |
| Foreign tax credit | Nothing to offset. Carried forward, unused |
Illustrative. Purchased 1998 for ₹8,00,000. Fair market value ₹12,00,000 at April 1, 2001 and ₹1,60,00,000 at the date of death. Sold November 2026 for ₹1,80,00,000. Indian tax at 12.5% plus 15% surcharge and 4% cess. Exchange rates are illustrative. Use the actual spot rates on your dates.
India taxes ₹1,68,00,000 of gain and collects ₹25,11,600, roughly $26,160. The US calculation produces a $5,271 loss. The step-up reset the basis two years ago, and the rupee fell from ₹83 to ₹96 in between.
The foreign tax credit then fails, and most people do not expect that. The credit offsets US tax on the same income, and here there is no US tax to offset. The ₹25,11,600 stays unused in the passive category, the Form 1116 classification for investment income. It carries forward 10 years against future foreign investment income you may never earn. It is not refunded.
The loss is of limited use. A loss on property held for personal use cannot be deducted at all. If the flat had been rented and held for investment, it would be a capital loss, usable against capital gains and against $3,000 a year of ordinary income. If a parent was living in it, there is nothing to claim.
You do not report the flat itself. Foreign real estate held directly in your own name is not a foreign financial account. It stays off the FBAR, and off Form 8938 unless you hold it through a foreign trust, corporation or partnership. The NRO account holding the proceeds is a different matter.
Compliance Guardrail: The step-up needs a date-of-death valuation you can defend. A registered valuer's report prepared for the Indian mutation is the obvious document to use. Check that it states fair market value on the date of death rather than on the date of the report. If the IRS asks how you arrived at your basis, you can show that report.
3. Form 3520
A US person who receives more than $100,000 in a year by gift or bequest from a nonresident alien or a foreign estate reports it on Form 3520, Part IV. The threshold adds up across related foreign donors. No tax is due on the form. It is an information return. The penalty for not filing reaches 25% of the amount received, charged at 5% a month, and the IRS applies it routinely.
The test is who your parent was, and the location of the flat does not matter. A foreign estate is the estate of someone who was a nonresident alien at the time of death, meaning neither a US citizen nor a green card holder. An Indian citizen father who never held a green card leaves a foreign estate, and the form is required. A father who was a US citizen or green card holder leaves a US estate, and Form 3520 does not apply, even though the flat is in Pune. Many NRI parents hold green cards, so check the status before you assume the form is due.
The same question settles the estate tax answer. A nonresident alien's estate pays US estate tax only on US-situs assets, and an Indian flat is not one. A US citizen or green card holder's worldwide estate includes it.
One valuation serves both purposes. The value reported on Form 3520 is the date-of-death value in dollars, and that is also the figure that becomes your stepped-up basis under Section 1014. Commission one valuation, dated to the date of death, and use it for both.
The timing is often missed. The form is due when you receive the property, not when you sell it. The value you report is the value on the date you received it. If you inherited two years ago and did not file, the penalty risk exists now, whether or not you ever sell.
Playbook Move: Check whether Form 3520 was filed for the year you inherited, before you file anything for the year you sell. A missed filing is a separate problem from the sale. Deal with it first, with counsel.
4. Bought and inherited, side by side
| The same non-resident seller | Bought | Inherited |
|---|---|---|
| How you acquired it | Purchase, with your own funds | Inheritance |
| Title work before listing | None. The deed is in your name | Probate or legal heir certificate, then mutation |
| Taxed on receipt | Not applicable | No. India levies no inheritance tax |
| Indian cost of acquisition | What you paid | What the deceased paid, or FMV at Apr 1, 2001 |
| Indian holding period | From your purchase | Includes the deceased's period. Almost always long-term |
| US cost basis | What you paid, at the historic exchange rate | Fair market value at the date of death |
| Withholding | 14.95% of the whole price | 14.95% of your share, per heir, per residency |
| Lower deduction certificate | One, on Form 128 | One per non-resident heir, on Form 128 |
| Repatriation route | Up to two residential properties, if bought in foreign currency | USD 1m per financial year from NRO only |
| Proof the bank wants | Purchase deed and source of funds | Will, probate or heir certificate, death certificate, mutation |
| Agricultural land | Cannot buy it at all | Can inherit it, but may sell only to a resident Indian citizen |
| Repatriation ceiling | Two residential properties, a lifetime allowance | USD 1m per financial year, renewable |
| Extra US filing | None | Form 3520 above $100,000, at 25% penalty, if the parent was a nonresident alien |
For a non-resident seller under the Income Tax Act, 2025 and the Income-tax Rules, 2026.
Three rows matter most. The Indian cost basis carries over while the US basis steps up, and together those two rules create the mismatch. The repatriation limit constrains your timing, and no negotiation will move it. Form 3520 is an obligation that already exists, whether or not you ever sell.
Playbook Move: Run the US calculation before you accept an offer. If the step-up leaves you at a loss and the Indian tax gets no credit against it, the sale costs more than the rupee figures suggest. It is better to know that while you are still setting a price.
From Edition 14 of the NRI Playbook newsletter. For informational purposes only; not financial, tax, or legal advice. For decisions about your specific situation, consult a qualified cross-border tax professional.