Capital Gains Tax for NRIs: US and India Rules Explained

The United States taxes capital gains based on two factors: how long you held the asset (holding period) and your overall taxable income (tax bracket).

### Short-Term Capital Gains

Assets held for one year or less produce short-term capital gains, which are taxed as ordinary income. For 2025, the ordinary income tax brackets are:

If you are in the 24% tax bracket, your short-term capital gains are taxed at 24%.

### Long-Term Capital Gains

Assets held for more than one year qualify for preferential long-term capital gains rates:

### Net Investment Income Tax (NIIT)

In addition to the capital gains rates above, the 3.8% Net Investment Income Tax applies if your modified adjusted gross income (MAGI) exceeds:

• $200,000 for single filers
• $250,000 for married filing jointly
• $125,000 for married filing separately

The NIIT applies to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. For many NRI professionals with six-figure salaries and investment income, the NIIT effectively adds 3.8% to their capital gains rate, making the top effective rate 23.8% (20% + 3.8%).

Estimate your capital gains tax liability with our free calculator.

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Understanding Indian rates is important for NRIs because you may need to calculate your Foreign Tax Credit or determine whether you are better off paying tax in India versus claiming a credit on your US return.

### Indian Capital Gains Rates (Post-2024 Budget)

Note: The 2024 Union Budget significantly changed Indian capital gains rules. Indexation benefit for long-term capital gains on property has been removed for sales after July 23, 2024, replaced by a flat 12.5% rate. NRIs selling Indian property should evaluate the impact carefully.

### Surcharge and Cess

Indian capital gains tax for NRIs also includes:

• Surcharge: 10% to 37% depending on income level
• Health and Education Cess: 4% on tax plus surcharge

The effective LTCG rate on listed equity for an NRI in the highest surcharge bracket can reach approximately 14.95% after surcharge and cess instead of 14.3%.

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If you sell US-listed stocks, ETFs, or options, you must report each transaction on your federal tax return.

### Forms Required

1. Form 8949 (Sales and Other Dispositions of Capital Assets) — Lists each individual transaction with date acquired, date sold, proceeds, cost basis, and gain/loss
2. Schedule D (Capital Gains and Losses) — Summarizes your total short-term and long-term gains/losses from Form 8949

### Cost Basis Reporting

Your brokerage reports your proceeds and cost basis to the IRS on Form 1099-B. However, cost basis may be incorrect or missing in certain situations:

• RSU shares: The cost basis on 1099-B is often reported as $0 because the brokerage does not account for the income already included in your W-2 at vesting. You must adjust the basis to the fair market value on the vest date.
• ESPP shares: Similar issue — the cost basis may not reflect the discount that was already taxed as ordinary income.
• Transferred securities: If you transferred shares between brokerages, the receiving broker may not have cost basis information.

Always reconcile your 1099-B against your own records before filing. Incorrect cost basis is the most common source of overpaid capital gains tax for NRI investors.

### Wash Sale Rules

The wash sale rule (IRC Section 1091) disallows a capital loss if you purchase a "substantially identical" security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the replacement shares.

Example: You sell 100 shares of AAPL at a $5,000 loss on December 15. On January 5 (within 30 days), you buy 100 shares of AAPL. The $5,000 loss is disallowed and added to the cost basis of the new shares.

Wash sale rules apply across accounts — including IRAs and brokerage accounts. Your brokerage may track wash sales within a single account, but not across multiple accounts. You are responsible for tracking cross-account wash sales.

### Cost Basis Methods

When selling partial positions, the IRS allows several cost basis identification methods:

• FIFO (First In, First Out): Default method — oldest shares are sold first
• Specific Identification: You choose which lot to sell (must identify before the trade is executed)
• Average Cost: Allowed only for mutual fund shares and certain dividend reinvestment plan shares

For tax optimization, specific identification often produces the best result because you can choose to sell high-basis lots (reducing your gain) or long-term lots (qualifying for lower rates).

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This is where NRI tax filing gets complicated. Indian mutual funds — including equity, debt, and hybrid funds — are almost always classified as Passive Foreign Investment Companies (PFICs) under US tax law.

### What Is a PFIC?

Under IRC Section 1297, a foreign corporation is a PFIC if either:

1. 75% or more of its gross income is passive income (interest, dividends, capital gains), OR
2. 50% or more of its assets produce or are held for the production of passive income

Indian mutual funds meet these tests. Even equity-oriented funds that invest in Indian stocks are PFICs because a mutual fund's income (from the underlying stocks) is treated as passive income at the fund level.

### Why PFIC Treatment Is Punitive

The default PFIC taxation method (the "excess distribution" method under IRC Section 1291) is intentionally harsh:

1. Gains are allocated ratably over the holding period
2. Gains allocated to prior years are taxed at the highest marginal rate for that year (currently 37%)
3. An interest charge is applied on the tax for prior years, as if the tax had been due and unpaid in those years

Can result in a significantly higher effective tax burden due to top-rate taxation and interest charges.

### Alternatives to Default PFIC Treatment

### Practical Advice

The PFIC rules make Indian mutual funds extremely tax-inefficient for US tax residents. Many NRI tax advisors recommend:

• Many tax advisors caution that Indian mutual funds can create complex U.S. tax reporting requirements and potentially unfavorable PFIC tax treatment
• If you hold existing Indian mutual funds, consider liquidating them and reinvesting in US-listed index funds or ETFs that provide similar exposure (e.g., iShares MSCI India ETF — ticker INDA)
• If you choose to hold Indian mutual funds, file Form 8621 annually for each fund and consider the mark-to-market election if eligible
• Direct Indian equity investments (individual stocks on NSE/BSE) are not PFICs and are reported normally on Form 8949 and Schedule D

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Selling real estate in India is one of the most common capital gains events for NRIs, and it involves tax obligations in both countries.

### Indian Tax on Property Sale

When an NRI sells property in India: The buyer is required to deduct TDS under Section 195 at generally higher rates on the sale consideration (typically 20%+ plus surcharge and cess for long-term capital gains and 30%+ plus surcharge and cess for short-term capital gains), unless a lower deduction certificate is obtained from the tax authorities.

• The buyer is required to deduct TDS (Tax Deducted at Source) — on the sale consideration.
• The NRI may need to file an Indian income tax return to claim a refund if TDS exceeds actual tax liability
• Long-term capital gains (LTCG) in India are taxed at 12.5% on the capital gain amount, not on the sale consideration
• Capital gains are calculated as sale price minus cost of acquisition (no indexation for sales after July 23, 2024)
• Section 54 exemption is available if proceeds are reinvested in another Indian residential property within specified timelines

### US Tax on Indian Property Sale

As a US tax resident, you must report the Indian property sale on your US tax return:

1. Convert all amounts to USD using the IRS exchange rate for the relevant dates (acquisition date and sale date). Use the yearly average exchange rate published by the IRS or the spot rate on the actual transaction dates.

1. Calculate gain in USD:

• Sale proceeds (in USD at sale-date exchange rate)
• Minus: Cost basis (in USD at acquisition-date exchange rate)
• Minus: Improvement costs (in USD at the exchange rate when incurred)
• Equals: Capital gain in USD

1. Report on Form 8949 and Schedule D as a long-term or short-term gain based on the US holding period (>1 year = long-term)

1. Apply the Foreign Tax Credit (Form 1116) for Indian capital gains tax paid

### Currency Conversion Creates a Hidden Tax

Because the Indian rupee has depreciated significantly against the US dollar over time, NRIs often face a larger capital gain on their US return than on their Indian return.

Example: You bought a flat in Mumbai for Rs 50,00,000 in 2010 when the exchange rate was Rs 45/USD (cost basis = $111,111). You sell it in 2025 for Rs 1,50,00,000 when the exchange rate is Rs 85/USD (proceeds = $176,471). Your US capital gain is $65,360 — but your Indian capital gain (before indexation) is Rs 1,00,00,000 ($117,647 at the sale-date rate). The rupee depreciation reduced your USD proceeds while your USD cost basis was locked at the higher 2010 exchange rate.

This is not a quirk — it is inherent to the US requirement that gains be computed in the taxpayer's functional currency (USD).

Estimate your tax on Indian property sales with our NRI property sale calculator.

### DTAA Article 13 — Capital Gains

Article 13 of the US-India DTAA provides that capital gains from the sale of immovable property (real estate) may be taxed in both countries — the country where the property is situated (India) and the country of residence (US). Double taxation is relieved through the Foreign Tax Credit mechanism (Article 25).

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The Foreign Tax Credit (FTC) is the primary mechanism to avoid double taxation on capital gains that are taxed in both India and the US. You claim the FTC on Form 1116.

### How the FTC Works

1. Identify the foreign source capital gain (Indian property sale, Indian stock sale)
2. Calculate the Indian tax paid on that gain (TDS, advance tax, or self-assessment tax)
3. Calculate the US tax attributable to that foreign source gain
4. Your FTC is the lesser of the Indian tax paid or the US tax on that income

### Separate Basket Limitation

The FTC has a "basket" system. Capital gains fall into the passive category income basket on Form 1116. The limitation is calculated separately for each basket, so excess credits from passive income cannot offset US tax on general category income (like salary).

### Carryover Rules

If your Indian tax paid exceeds the US tax on that income (creating excess FTC), you can:

• Carry back the excess 1 year, OR
• Carry forward the excess up to 10 years

### Practical Considerations

In most cases, because US rates on long-term gains (15–23.8%) exceed Indian rates (12.5%), you will owe some additional US tax even after the FTC.

### Timing Mismatch

India and the US may recognize the gain in different tax years if the transaction straddles the calendar year boundary or if the Indian tax is paid in a different year than the sale. Ensure you claim the FTC in the US tax year that corresponds to when the income was reported on your US return.

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### Inherited Indian Property

If you inherit property in India, your cost basis for US purposes is the fair market value on the date of the decedent's death (stepped-up basis under IRC Section 1014). This is often significantly different from the Indian cost basis (which may use the original purchase price or indexed cost). The stepped-up basis can substantially reduce your US capital gain when you sell.

### Gifted Indian Property

For gifted property, your US cost basis is generally the donor's adjusted basis (carryover basis under IRC Section 1015). If the FMV at the time of gift was less than the donor's basis, special rules apply for determining loss. The gift may also need to be reported on Form 3520 if the value exceeds $100,000 in a calendar year (reporting only, not taxation).

### Indian Debt Mutual Funds

Post-2024 Indian budget, debt mutual funds in India are taxed at the individual's slab rate regardless of holding period. On the US side, they are still PFICs, subject to the excess distribution method unless an election is made. The combined effect makes Indian debt mutual funds one of the most tax-inefficient investments for US tax residents.

### Crypto and Digital Assets

If you hold cryptocurrency on Indian exchanges (WazirX, CoinDCX, etc.), India imposes a flat 30% tax on gains (Section 115BBH) with no offset for losses. On the US side, crypto is treated as property — gains are taxed at regular capital gains rates. The 30% Indian crypto tax can generate significant excess FTCs that may be difficult to use.

While Indian tax paid may potentially qualify for the Foreign Tax Credit (FTC), its usability depends on IRS limitation rules, income category classification, and timing alignment. As a result, excess FTC from crypto transactions may not always be fully utilizable in the same tax year.

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### How are capital gains on US stocks taxed for NRIs?

If you are a US tax resident (pass the Substantial Presence Test or hold a green card), US stock gains are taxed the same as for any US person. Short-term gains (held 1 year or less) are taxed as ordinary income (10–37%). Long-term gains (held over 1 year) are taxed at 0%, 15%, or 20%, plus the 3.8% NIIT if your income exceeds $200,000 (single) or $250,000 (MFJ). Report all transactions on Form 8949 and Schedule D.

### Are Indian mutual funds treated differently from Indian stocks for US tax?

Yes — significantly. Indian mutual funds are classified as Passive Foreign Investment Companies (PFICs), which are subject to punitive tax treatment under IRC Section 1291. Indian stocks held directly (individual equities on NSE/BSE) are not PFICs and are reported normally on Form 8949. This is why many NRI tax advisors recommend avoiding Indian mutual funds and investing directly in Indian equities or US-listed India ETFs.

### How do I report the sale of Indian property on my US tax return?

Convert all amounts (purchase price, sale price, improvement costs) to USD using the exchange rate on the relevant transaction dates. Calculate the gain in USD and report it on Form 8949 and Schedule D. File Form 1116 to claim the Foreign Tax Credit for Indian capital gains tax (TDS) paid. The gain may be larger or smaller in USD terms than in INR terms due to exchange rate changes.

### Can I offset US capital losses against Indian capital gains?

Yes. On your US tax return, capital losses from any source (US or foreign) can offset capital gains from any source. If your net capital losses exceed your capital gains, you can deduct up to $3,000 ($1,500 if married filing separately) of net capital losses against ordinary income per year. Excess losses carry forward indefinitely.

### What is the NIIT and does it apply to NRIs?

The Net Investment Income Tax (NIIT) is a 3.8% surtax on the lesser of your net investment income or the amount by which your MAGI exceeds $200,000 (single) or $250,000 (MFJ). It applies to capital gains, dividends, interest, rental income, and other investment income. Most NRI professionals with six-figure salaries are subject to the NIIT, making their effective long-term capital gains rate 18.8% or 23.8%.

### How does the Foreign Tax Credit work for Indian property sales?

File Form 1116 in the passive category income basket. Your FTC is limited to the lesser of Indian tax paid or the US tax attributable to the Indian-source capital gain. If Indian tax exceeds the US tax on that income, the excess can be carried back 1 year or forward 10 years. In most cases, US rates exceed Indian LTCG rates, so you will owe some additional US tax.

### Should I sell my Indian mutual funds before becoming a US tax resident?

This is a common and generally sound strategy. Selling Indian mutual funds before you become a US tax resident avoids PFIC complications entirely. The gain would be taxed only in India (at Indian rates). Once you are a US tax resident, those same funds become PFICs, and future gains may be taxed at rates exceeding 40% under the default excess distribution method. Consult a tax professional to evaluate the timing of your residency transition.

### Do wash sale rules apply to Indian stock transactions?

Yes. The wash sale rule applies to all securities, including foreign securities. If you sell Indian stocks at a loss and repurchase substantially identical shares within 30 days (on NSE, BSE, or any other exchange), the loss is disallowed for US tax purposes. Your brokerage will not track this for Indian securities — you must track wash sales on foreign exchanges yourself.

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