Selling an inherited flat: a gain in India, a loss on your US return.

Edition 14 · The Property File, Part 2 of 2 · The inherited sale: heirship, carryover cost, and the $1 million ceiling

Manish Hemrajani
September 20, 2026

The Rundown

A note before we begin. NRI Playbook paused for a few weeks while I was on vacation in Europe. It returns with this issue, the second and final part of The Property File. From here, the newsletter will appear every other Sunday rather than weekly.

Part 1 covered a property you bought. This one covers a property you did not. If you have inherited a flat in India, read it before you list. If a sibling or a cousin has, send it to them.

India uses your parent's cost. The IRS uses the value on the day he/she passed away. India carries the previous owner's cost of acquisition across to you, so your gain is measured from what he paid when he bought the flat, however long ago that was. The United States resets your basis to fair market value at the date of death. Run one sale through both systems and you can finish with a large taxable gain in India and a loss on your 1040.

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 bill arrives when you sell it, calculated from a price that you never paid.

You cannot use the two-property repatriation route. That route was written for sellers who bought with foreign currency, which is not how you acquired the flat. Proceeds from inherited property leave India under the general ceiling of USD 1 million per financial year from your NRO account.

Each heir is withheld on separately. A flat passing to three siblings is three sales for withholding purposes, each taxed at whatever rate that heir's residency carries. A brother in Mumbai has 1% deducted, you have 14.95%, and both figures appear on the same registered deed.

Whether a US filing is due depends on your parent's immigration status. Form 3520 reports a bequest above $100,000 from a foreign estate. 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. If your parent held a green card, the estate is a US estate and the form does not apply. If your parent did not, the form is required, and the penalty for not filing is up to 25% of the amount you received.

THE DEEP DIVE - COMPLIANCE GUARDRAIL

Selling the flat you inherited

Part 1 assumed three things: that you bought the property, that the title is in your name, and that you can sign the deed yourself. None of the three is true of an inherited sale. First the revenue record has to be changed into your name, which can take a year if the estate is contested. Then you are taxed on a price your father paid decades ago. The amount you can send to the US is also capped, in a way it would not have been on a flat you bought.

The withholding rules from Part 1 do not change. Section 393(2) of the Income Tax Act, 2025, the old Section 195, still applies at 14.95% of the whole sale price for a long-term sale above ₹1 crore, with no minimum transaction size. Everything before and after that deduction is different.

1. Establishing that the property is yours to sell

A buyer will not register a purchase from someone whose name is not on the revenue record, and getting your name onto it is the slowest part of an inherited sale. Where you start depends on whether your parent left a will.

With a will, you need the original document, the death certificate, and often probate, which is a court order confirming the will is valid. Probate is compulsory for wills made or property located inside the ordinary original civil jurisdictions of Bombay, Calcutta and Madras, which are the historic city limits of Mumbai, Kolkata and Chennai. Everywhere else the law makes it optional, but banks and buyers' lawyers ask for it so often that you will probably need it anyway. Allow six months to two years, and longer if anyone objects.

Without a will, succession follows personal law. For Hindus, Buddhists, Jains and Sikhs, the Hindu Succession Act, 1956 splits the property equally among Class I heirs, which include the widow, the children and the mother. The 2005 amendment gave daughters the same coparcenary rights as sons, meaning an equal share in ancestral property from birth. In 2020 the Supreme Court confirmed that this applies whether or not the father was alive when the amendment passed. Muslim shares are fixed by personal law and pass immediately on death, with no probate and no court order needed. Christians and Parsis come under the Indian Succession Act, 1925.

The paperwork runs in a set order. A legal heir certificate from the tahsildar, the local revenue officer, establishes who the heirs are. A succession certificate is a different document, issued by a civil court, and it covers debts and movable securities rather than immovable property. Families confuse the two and lose months doing it. Any heir giving up a share signs a registered relinquishment deed, or the family signs a registered family settlement deed. The title can then be mutated into the heirs' names in the municipal or revenue record.

After mutation, assemble the file Part 1 described: chain of title, encumbrance certificate, current tax receipts, society NOC, approved plan. Add your parent's original purchase deed. It matters more here than it did in Part 1, because it sets the cost India will tax you on.

Agricultural land, farmhouses and plantation property follow different rules. You may inherit one. You may not buy one, and FEMA also stops you from receiving one as a gift. No RBI permission is needed to inherit from a person resident in India.

The restriction returns when you sell. Inherited agricultural land can be sold only to a person resident in India who is an Indian citizen. That rules out other NRIs and OCI holders, and it removes much of the buyer pool in the districts where inherited farmland usually is. It is a common reason these sales stall.

Whether the proceeds can leave India at all is unsettled. Some advisers apply the general USD 1 million annual limit. Others read the RBI Master Direction as allowing repatriation only for property other than agricultural land, plantation property and farmhouses, which would leave the money in India. Get a written position from your authorized dealer bank before you sign. Once the money is in your NRO account, you are limited to what the bank will allow.

2. What the buyer withholds when there are several heirs

Each co-owner is a separate seller for withholding. The buyer deducts on each heir's share of the sale price, at the rate that applies to that heir.

This is common, and it is where buyers get it wrong. Suppose a flat passes to three siblings, one living in Bengaluru and two in the United States. On a ₹1,80,00,000 sale the buyer deducts 1% from the resident's ₹60,00,000 share and 14.95% from each of the other two shares. All three deductions have to be right on one registration, and most individual buyers have never done it.

The lower deduction certificate works the same way. Each non-resident heir applies separately on Form 128 under Section 395, using their own PAN, and gets a certificate for their own share only. One certificate will not cover the family.

Playbook Move: Have every non-resident heir file Form 128 at the same time, in the same jurisdiction, referencing the same sale agreement. Assessing officers work through a coordinated set faster than three applications arriving separately over two months.

3. Your cost basis in India

Your cost of acquisition is whatever the previous owner paid. Inheritance is not a transfer for capital gains purposes, so nothing is taxed when the flat passes to you. The tax falls on your sale, and 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. That is the one part of the carryover rule that helps you, because it puts you at 12.5% instead of slab rates.

Where the property was bought before April 1, 2001, you may use the fair market value on that date instead of the original price. This 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. As Part 1 explained, 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.

4. Your cost basis in the United States

Section 1014 gives property inherited from someone who has died 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 long-term automatically.

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. 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, because 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, which is the part most people do not expect. The credit offsets US tax on the same income, and here there is no US tax to offset. The ₹25,11,600 sits unused in the passive category, the Form 1116 classification for investment income. It carries forward ten years against future foreign investment income you may never earn, and 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.

One thing you do not report: 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, but 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, that report is your answer.

5. 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, and the penalty for not filing reaches 25% of the amount received, charged at 5% a month. The IRS applies it routinely.

The test is who your parent was, not where the flat is. A foreign estate is the estate of someone who was a nonresident alien at the time of death. 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 does two jobs. 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.

Timing catches people out. The form is due when you receive the property, not when you sell it, and 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, and it should be dealt with first, with counsel.

6. Moving the money

This is the second place inheritance is treated differently.

Part 1 described two ways out. The first allows repatriation of the sale proceeds of up to two residential properties, provided you bought the property with an inward remittance or from an NRE or FCNR account. It depends on how the seller acquired the property, and you acquired it by inheritance, so that route is closed to you. It is also a lifetime allowance of two properties, not two a year. If you have already used it on a flat you bought, it is gone.

That leaves the general limit: USD 1 million per financial year, in total, from your NRO account across every source. A ₹1,80,00,000 sale produces about $1,875,000 before tax, so a single transaction can exceed the annual limit on its own. You send the rest after the new financial year begins in April, or you apply to the Reserve Bank for approval above the limit.

Your authorized dealer bank will want documentary proof of the inheritance before it releases anything. That means the will and probate, or the legal heir certificate, plus the death certificate and the mutation record. Banks enforce this strictly, and the file you assembled for the Indian registration is not the same file the remittance desk wants.

The filings are unchanged from Part 1. Form 146, the old 15CB, from a chartered accountant, and Form 145 Part C filed by you, both under Rule 220.

Playbook Move: If the sale will exceed $1 million, either time the registration near the end of March so the receipt splits across two financial years, or start the RBI application before you sign. Banks generally raise the ceiling only after the remittance has been refused.

7. Bought and inherited, side by side

Part 1 and Part 2, for the same non-resident seller.

Bought and Inherited

The same seller, the same country, two ways of acquiring a flat.

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. Green marks the lighter position, red the heavier one.

Three rows do most of the work. 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. And 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. Better to know that while you are still setting a price.

COMING IN TWO WEEKS

What to do with your orphaned 401k left in the US?

Most people who have changed jobs in the US have a 401(k) sitting with a former employer, still compounding, statements unopened. Nothing is wrong with that while you live here. The next issue is about what happens if you stop.

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