For the tax withheld when you sell, start with NRI selling property in India: 14.95% TDS on the sale price.
Residents selling property bought before July 23, 2024, can choose between a 20% tax rate with indexation or 12.5% without it. They pay whichever is lower under Section 197(3) of the Income Tax Act, 2025. Non-residents cannot. The advantage is smaller than it sounds. On a flat bought at ₹60 lakh and sold at ₹2 crore, a resident saves only about 3% of the tax bill.
This post covers the tax itself on a flat you bought and hold in your own name. It explains who gets indexation, how to reduce the Indian tax, and what the United States takes. The withholding at registration, the title file and the wire home are in the 14.95% TDS on the sale price.
Indexation, and who is allowed to use it
Until July 23, 2024, long-term gains on land and buildings were taxed at 20% on an inflation-adjusted cost. The Finance (No. 2) Act, 2024 lowered the rate to 12.5% and removed this adjustment. An August 2024 amendment restored the old method as an option for properties acquired before that date.
Section 197(3) of the Income Tax Act, 2025 restricts this choice to resident individuals and Hindu Undivided Families ("an individual or HUF, being a resident"). It carries forward the old Section 112 proviso. Non-residents fall under Section 197(1)(b) instead. They pay a flat 12.5% without indexation regardless of the purchase date, as corporate entities and LLPs do. (An earlier post, the 12.5% trap, shows what losing indexation did to one Mumbai sale.)
Two owners of identical flats in the same building, selling on the same day for the same price, report different taxable gains and pay different tax. The only reason is that one is a resident and the other is not.
The resident indexation advantage is real, but the financial benefit is often much smaller than most sellers assume.
Indexation, side by side: the taxable base differs
| Same flat, sold the same day | Resident seller | Non-resident seller |
|---|---|---|
| Method available | Lower of 12.5% without indexation, or 20% with indexation | 12.5% without indexation only |
| Statutory basis | Section 197(3), ITA 2025 | Section 197(1)(b), ITA 2025 |
| Purchase price, 2012 | ₹60,00,000 | ₹60,00,000 |
| Cost of acquisition used | ₹1,15,20,000 (indexed 200 → 384) | ₹60,00,000 |
| Taxable long-term gain | ₹84,80,000 | ₹1,40,00,000 |
| Rate applied | 20% | 12.5% |
| Tax before surcharge and cess | ₹16,96,000 | ₹17,50,000 |
| Difference | ₹54,000 lower |
Illustrative, on a flat bought in 2012 for ₹60,00,000 and sold in 2026 for ₹2,00,00,000. Cost Inflation Index 200 for 2012-13 and 384 for tax year 2026-27, notified July 15, 2026. The resident pays the lower of the two computations. Surcharge and cess apply on top of both figures.
On this transaction the gap is ₹54,000, about 3% of the bill. That is the resident's entire advantage.
The gap turns on appreciation, not on holding period. Indexation raises the cost by a fixed multiple, then applies the higher 20% rate. Where appreciation has been modest, the indexed computation costs less. Where it has been large, the flat method costs less, and the resident elects it as well. At a Cost Inflation Index (CII) of 384 the crossover for a 2012-13 purchase sits at about 3.45 times cost. The example sold at 3.33 times, inside the band.
When indexation wins
The table shows the sale price as a multiple of cost. Above the figure, the resident pays what you pay.
| Year of purchase | CII | Indexation wins below |
|---|---|---|
| 2001-02 | 100 | 8.57x |
| 2005-06 | 117 | 7.09x |
| 2010-11 | 167 | 4.47x |
| 2012-13 | 200 | 3.45x |
| 2015-16 | 254 | 2.36x |
| 2020-21 | 301 | 1.74x |
| 2023-24 | 348 | 1.28x |
Computed at CII 384 for tax year 2026-27, comparing 20% on the indexed gain against 12.5% on the unindexed gain, before surcharge and cess. Property acquired on or after July 23, 2024 has no indexation option for anyone.
Two conclusions follow. A resident selling a flat that has multiplied more than 3.5 times since 2012 pays exactly what you pay, because the flat 12.5% method is cheaper for both. The indexation option is worth most on properties that performed worst.
Three conditions attach to the resident option. Electing it forfeits the carry-forward and set-off of losses. It computes tax only without raising the reinvestment threshold for exemptions. It is unavailable on any property acquired on or after July 23, 2024.
One inflation relief survives for non-residents. Properties acquired before April 1, 2001 may use their fair market value on that date as the cost of acquisition under the 2025 Act, provided you obtain a valuation from a registered valuer.
Reducing the tax itself
Three provisions help defer or eliminate long-term capital gains tax under the Income Tax Act, 2025. Banks and chartered accountants still widely use the old section numbers.
- Section 54: Reinvest your capital gains into one residential property in India, purchased one year before or two years after the sale, or constructed within three years. This is capped at ₹10 crore, and the replacement property must be in India (a U.S. home does not qualify).
- Section 54EC: Invest your gains into specific bonds issued by NHAI, REC, PFC, or IRFC within six months of the sale. This offers tax deferral capped at ₹50 lakh across all such holdings, with a mandatory five-year lock-in. The bonds yield a modest coupon taxable in both India and the U.S.
- Capital Gains Account Scheme (CGAS): If you intend to reinvest under Section 54 but cannot complete the purchase before your Indian tax return due date, depositing the funds into a designated CGAS account satisfies the timeline. Any withdrawn money left unused within the statutory window becomes fully taxable that year.
What the United States takes
India taxes the sale. So does the United States. The IRS treats it as a disposition of a capital asset and computes the gain in dollars.
Your basis is historic. Convert the purchase price at the rate on the purchase date, the sale price at the rate on the sale date, and improvements at the rates on the dates paid.
Historic cost bases drive U.S. dollar gains using exchange rates from purchase dates (e.g., ₹53.44 in 2012 versus ₹44.94 in 2000), while the rupee's steady depreciation means the rupee gain is nearly three times the dollar gain.
Federal tax applies at 15% or 20% long-term capital gains plus the 3.8% net investment income tax. That totals roughly $17,900 on a $95,125 gain.
The foreign tax credit (Form 1116, passive category) handles the Indian tax of ₹20,93,000 (about $21,800). Because it exceeds the U.S. tax, the excess carries forward for 10 years without refund. Timing rules require careful handling to match fiscal years.
The treaty does not reduce the Indian tax. Article 13 of the India-U.S. treaty sets no reduced rate for capital gains. That leaves India to tax local property in full, while Article 25 prevents double taxation. Hold a Tax Residency Certificate and Form 10F, though neither lowers the rate.
The residence exclusion, if it applies, can exclude $250,000 of gain ($500,000 joint) under Section 121. It applies if you occupied the property as a principal residence for two of the five years before sale. Most long-term NRI flat sellers will not meet that test.
Depreciation recapture applies if the property was rented. It recaptures allowed or allowable Schedule E depreciation at up to 25%, regardless of whether it was claimed.
State tax adds to the burden because New Jersey grants zero credit for foreign income taxes. The full $95,125 gain faces New Jersey gross income tax at 6.37% (about $6,060), with no offset for taxes already paid in India.
The numbers to work out before you list
- The Indian tax, which is 12.5% of the unindexed gain, plus surcharge and cess. On the example flat that is ₹20,93,000.
- What Section 54, Section 54EC or the 2001 valuation would take off it, and whether you can meet their deadlines from abroad.
- The US gain in dollars, at the exchange rates on your purchase and sale dates, and the federal and state tax on it.
- How much of the Indian tax the foreign tax credit absorbs, and how much carries forward.
If you want the two returns prepared together, see our India tax return and US tax return services.
From Edition 13 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.