Key Takeaways
- US citizens, Green Card holders, and tax residents are taxed on worldwide income, including Indian capital gains, even if full tax/TDS is paid in India.
- Short-term gains (≤ 1 year) are taxed at ordinary rates up to 37%; long-term gains (> 1 year) at 0%, 15%, or 20% in the US.
- Each purchase and sale must be converted to USD using historical exchange rates, which can create taxable gains due to currency movement.
- Indian indexation benefits are not allowed in US returns; STT is generally not creditable as foreign income tax.
- Indian property and securities sales are reported on Form 8949 and Schedule D; foreign tax credit is claimed via Form 1116.
- Most Indian mutual funds are treated as PFICs, requiring Form 8621 filing annually—even without sale.
- Foreign tax credits can be carried forward for 10 years if excess credit arises.
Introduction
As more Indian CAs expand into US tax preparation, capital gains from Indian assets become one of the most frequent and technically misunderstood areas. Clients who are US citizens or Green Card holders often sell Indian property, listed shares, mutual funds, or unlisted equity—assuming Indian tax compliance is sufficient.
It is not.
The US tax system applies worldwide income rules, separate holding period standards, and strict USD conversion requirements. A transaction that appears tax-neutral in India may trigger significant US liability.
This guide explains how to handle US tax on Indian capital gains from a practitioner’s perspective. We will cover US vs India differences, Schedule D and Form 8949 mechanics, PFIC implications for mutual funds, foreign tax credit strategy, and a step-by-step numerical walkthrough.
US Tax on Indian Capital Gains: Why It Matters
Who Must Report Indian Capital Gains in the US?
You must report Indian capital gains in the US return if your client is:
- A US citizen
- A Green Card holder
- A US tax resident under the Substantial Presence Test
This includes gains from Indian property, listed stocks, mutual funds, and unlisted shares—even if TDS was deducted in India.
US Worldwide Income Rules Explained
The US taxes residents on worldwide income. Payment of Indian capital gains tax does not eliminate US reporting. Relief is provided through the Foreign Tax Credit (Form 1116), not exclusion.
Core reporting forms include Form 8949 (transaction-level reporting) and Schedule D (summary of capital gains). Failure to report can trigger penalties even if no additional US tax is due.
Practitioner Tip: Always reconcile Indian AIS/26AS data with US reporting. IRS matching increasingly relies on global information exchange.
How Are Indian Capital Gains Taxed in the US?
US Capital Gains Tax Rates (Short-Term vs Long-Term)
The US classification depends strictly on a 1-year holding period:
- Short-term (≤ 1 year): Taxed at ordinary income rates (10% to 37%).
- Long-term (> 1 year): Taxed at preferential rates of 0%, 15%, or 20%.
The 3.8% Net Investment Income Tax may also apply for higher-income clients.
How the US Determines Holding Period
The holding period begins the day after acquisition and includes the date of sale. Unlike India, which may use 24 months for property LTCG classification, the US applies a uniform 12-month threshold.
This can create classification mismatches. A property treated as long-term in India could still be short-term in the US if held 18 months.
Currency Conversion Rules (INR to USD)
Each leg of the transaction must be converted separately:
- Purchase price → USD using exchange rate on purchase date
- Sale price → USD using exchange rate on sale date
This can create “phantom gains.” Even if there is no INR gain, depreciation of INR against USD may produce a taxable US gain.
Practitioner Tip: Use reliable historical exchange sources and document the rate methodology in working papers.
US vs India: Key Differences in Capital Gains Treatment
Holding Period Differences
| Asset | India LTCG Rule | US LTCG Rule |
|---|---|---|
| Immovable Property | 24 months | 12 months |
| Listed Shares | 12 months | 12 months |
| Unlisted Shares | 24 months | 12 months |
Indexation Benefit in India vs No Indexation in US
India allows indexation for certain long-term assets (e.g., property). The US provides no indexation adjustment. Cost basis is historical USD cost.
Never apply Indian indexed cost in US returns.
STT (Securities Transaction Tax) and Its Treatment
Indian listed equity LTCG enjoys concessional treatment after STT. The US ignores STT framework entirely.
STT is generally not creditable as foreign income tax. It may be added to transaction cost but not claimed under Form 1116.
TDS in India vs Estimated Taxes in the US
India may deduct TDS on property sales (often 20% plus surcharge/cess). The US does not withhold automatically but may require estimated tax payments.
The US-India DTAA allows foreign tax credit but does not remove reporting requirements. See this detailed Foreign Tax Credit Form 1116 guide for mechanics.
How to Report Indian Property Sale in the US
Step 1: Calculate Gain in USD (Cost Basis Rules)
Cost basis includes purchase price, stamp duty, registration fees, and capital improvements. Convert purchase and sale separately into USD using historical rates.
Inherited property generally receives stepped-up basis to fair market value at date of death (USD equivalent).
Step 2: Report on Form 8949
Each property sale is listed on Form 8949 with:
- Description of property
- Date acquired and date sold
- USD proceeds and USD cost basis
- Resulting gain or loss
Step 3: Transfer Totals to Schedule D
Totals from Form 8949 flow into Schedule D. Refer to the IRS instructions for Schedule D (Form 1040) for category mapping.
Schedule D then calculates net short-term and long-term gains.
Step 4: Claim Foreign Tax Credit (If Applicable)
Indian capital gains tax paid (including TDS) may be claimed via Form 1116. Credit is limited to US tax attributable to foreign-source income.
Excess credit may be carried back 1 year or forward 10 years.
Practitioner Tip: Allocate foreign taxes to the correct income basket (generally passive category for capital gains).
US Tax on Indian Stocks and Mutual Funds
Indian Listed Shares (STCG vs LTCG)
The US applies its own 1-year rule irrespective of Indian classification. Gains are reported on Form 8949 and Schedule D in USD.
Treatment of STT in the US
STT is not considered foreign income tax for US foreign tax credit purposes. It may increase acquisition/disposal cost but cannot be claimed under Form 1116.
Indian Mutual Funds and PFIC Rules (Form 8621)
Most Indian mutual funds are treated as Passive Foreign Investment Companies (PFICs). This triggers annual Form 8621 filing, even without sale.
PFIC default rules (excess distribution method) can result in high tax and interest charges. Review IRS guidance on Form 8621 for PFICs for compliance details.
For deeper technical treatment, see this guide on US tax on Indian mutual funds PFIC Form 8621.
Unlisted Shares and Private Equity
Unlisted Indian shares are not PFICs by default but must be analyzed. Capital gains are computed in USD and reported like other securities.
Valuation support is critical in private transactions.
Capital Gains Tax Rate for NRI in India (Context for Comparison)
Indian Property: STCG vs LTCG Rates
Property held > 24 months qualifies as LTCG in India and is typically taxed at 20% with indexation (subject to current law).
Listed Shares and Equity Mutual Funds
Equity LTCG above threshold is taxed at concessional rates after STT. STCG generally taxed at special rates.
Unlisted Shares and Debt Funds
Unlisted shares typically taxed at 20% with indexation for LTCG.
TDS Provisions for NRIs
Buyer must deduct TDS on purchase of property from NRI seller. Even after full Indian tax compliance, US reporting remains mandatory for US persons.
Common Mistakes in Reporting Indian Capital Gains
Ignoring Currency Fluctuation Effects
Failure to convert using historical rates leads to incorrect gain computation.
Using Indian Indexation in US Return
Indexation reduces Indian gain but cannot reduce US gain.
Not Filing Form 8621 for Mutual Funds
PFIC non-filing can keep statute of limitations open indefinitely.
Forgetting Schedule D or Form 8949
Broker summaries cannot replace mandatory form-level reporting.
Step-by-Step Reporting Walkthrough (Practical Example)
Example: Sale of Indian Apartment
Purchase: INR 50,00,000 in 2016 (Rate: 1 USD = 65) → USD 76,923 cost basis.
Sale: INR 1,00,00,000 in 2025 (Rate: 1 USD = 83) → USD 120,482 proceeds.
US long-term capital gain = USD 43,559.
Example: Sale of Indian Listed Shares
Purchased INR 10,00,000 (Rate 70) → USD 14,286.
Sold INR 12,00,000 (Rate 82) → USD 14,634.
INR gain exists, but USD gain is only USD 348—demonstrating currency impact.
How the Foreign Tax Credit Reduces Double Taxation
If Indian tax paid equals USD 10,000, but US tax on gain is USD 6,500, FTC limited to 6,500. Excess 3,500 carried forward.
This interaction must be computed carefully under Form 1116 limitation rules.
Conclusion
Handling US tax on Indian capital gains requires far more than converting numbers from an Indian computation sheet. You must reclassify holding periods, recompute cost basis in USD, ignore indexation, analyze PFIC exposure, and correctly apply Form 1116 limitations.
For Indian CAs building US tax capability, mastery of Schedule D, Form 8949, and PFIC compliance is essential. Develop standardized exchange-rate policies, PFIC checklists, and foreign tax credit reconciliation templates to ensure consistent, defensible filings.
FAQ
1. If full capital gains tax is paid in India, can we skip reporting in the US?
No. US persons must report worldwide income regardless of foreign tax paid. Relief is provided via foreign tax credit, not exemption. Non-reporting can trigger penalties. Always file Form 8949 and Schedule D.
2. Which exchange rate should be used for conversion?
Use the spot rate on the date of purchase and date of sale. Do not use average annual rates for capital transactions. Maintain documentation for audit support. Consistency in methodology is critical.
3. Can Indian indexation benefit reduce US taxable gain?
No. The US does not recognize Indian indexation adjustments. Cost basis is historical USD cost. Applying indexation would misstate US gain. Always recompute independently.
4. Is STT eligible for foreign tax credit?
Generally no. STT is not treated as income tax for US foreign tax credit purposes. It may increase transaction cost but is not creditable. Only income taxes qualify under Form 1116.
5. Are Indian mutual funds always PFICs?
In most cases, yes. Indian mutual funds typically meet PFIC income and asset tests. Form 8621 filing is required annually. Failure can keep statute open indefinitely.
6. How are inherited Indian properties treated?
Basis is generally stepped up to fair market value at date of death. Convert that value into USD using exchange rate on valuation date. Holding period is automatically long-term. Proper valuation documentation is essential.
7. Can foreign tax credit exceed US tax liability?
No. FTC is limited to US tax attributable to foreign-source income. Excess may be carried back one year or forward ten years. Limitation calculation is mandatory. Separate baskets must be analyzed.
8. Are estimated tax payments required after large property sales?
Possibly. If US tax due exceeds safe harbor thresholds, estimated payments may be required. Failure can trigger underpayment penalties. Review quarterly obligation after major gains.
9. Do we report each share transaction separately?
Yes, unless summary reporting is permitted under IRS rules. Each transaction must reflect correct USD basis and proceeds. Brokerage INR statements cannot be directly used. Maintain reconciliation schedules.
10. What is the biggest risk area for Indian CAs handling US capital gains?
PFIC non-compliance and incorrect USD conversion are the most common errors. Applying Indian logic directly to US returns is risky. Build standardized workflows. Review every Indian investment for PFIC exposure.
