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Selling a property received as a gift in India can trigger taxes in two countries at the same time. India taxes the sale because the property is located there, while the United States also taxes it because it taxes citizens and residents on worldwide income. The rules are often misunderstood, and many assume the property’s value on the gift date is what counts. In most cases, it isn’t—the original owner’s cost is the key factor shaping the tax result.

For U.S. taxpayers, the challenge is not just calculating the gain, but also reporting it correctly and using available credits so the same income is not taxed twice. Understanding how India and the United States look at the same transaction differently can save both money and stress.

How India Taxes the Sale of Gifted Property

In India, property received as a gift from specified relatives is usually tax-free at the time of transfer. Tax applies only when the recipient sells the property. For capital gains, both the holding period and cost of acquisition trace back to the donor. The holding period starts from the date the donor bought the property, and the costs are the donor’s original purchase price plus improvements.

This determines whether the gain is treated as long-term or short-term. Long-term gains may be taxed with or without indexation, depending on when the property was acquired, while short-term gains are taxed at slab rates. Non-residents generally must settle Indian taxes before repatriating sale proceeds.

The US view: Worldwide Income & Carryover Basis

The United States taxes its citizens and residents on worldwide income, so the sale of foreign property must be reported on a U.S. tax return. For gifted property, the key rule is the carryover basis. This means that the recipient generally uses the donor’s adjusted costs as the U.S. cost basis, not the property’s fair market value at the time of the gift. This rule applies even when the property is located outside the United States.

Special rules apply if the property is sold for less than its value at the time of the gift, using different bases for gains and losses. However, for most profitable sales, the donor’s original cost is used. The holding period for U.S. long-term capital gains also carries over from the donor’s purchase date.

Exchange Rates Can Quietly Change Your Tax Bill

Currency conversion plays a key role in U.S. tax reporting. Both the original costs and the sale price must be converted into U.S. dollars. The donor’s purchase price is converted using the exchange rate on the acquisition date, while the sale proceeds use the rate on the sale date. Because of this, a sale can show a larger gain in dollar terms even if the rupee gain is small. The United States also ignores India’s indexation benefit, calculating gains using historical dollar cost against dollar sale proceeds, which can increase the taxable gain on the U.S. return.

Avoiding Double Taxation With Foreign Tax Credits

Paying tax in India and the United States does not usually mean double taxation. Under the United States-India tax treaty, India has the primary right to tax gains from property located there. Therefore, the Indian tax is paid first. U.S. taxpayers can then claim a foreign tax credit for the Indian capital gains tax paid by filing IRS Form 1116.

This credit reduces U.S. tax on the same income but is limited to the U.S. tax attributable to that gain. In practice, this often means paying the higher of the two countries’ effective tax rates.

Reporting Does Not End With the Tax Return

The sale must be reported on Form 8949 and Schedule D of your U.S. tax return. Additional filings, such as the FBAR and Form 8938, may be required if sale proceeds held in Indian accounts exceed reporting thresholds. Missing these disclosures can lead to penalties even when income is properly reported. Keeping records of the donor’s purchase costs, improvements and Indian tax payments helps ensure smooth and accurate compliance.