July 31, 2025

US NRI Selling Property in India? Why This Wife Paid Zero Tax on ₹6 Cr Property Sale—But You Can’t

Quick Summary for NRIs

A Mumbai woman sold two residential properties worth ₹6 crore—gifted by her husband—and paid zero income tax in India by claiming Section 54 Long Term Capital Gains (LTCG) exemption. The Income Tax Appellate Tribunal (ITAT) Mumbai upheld her claim despite objections from the tax department.

But for US-based NRIs, such strategies do not work.

As a US citizen or green card holder, your worldwide income is taxable in the United States, including capital gains from property sales in India. Here's why this tax planning move may land US NRIs in IRS compliance trouble, and how you can legally structure your India–US cross-border transactions.

ITAT Mumbai 2025 Ruling – What Actually Happened?

Case Background

Two flats in Hiranandani, Mumbai were purchased jointly by a husband and wife in 2002.
In 2017, the husband gifted his share of the properties to the wife via a registered gift deed.
In 2020, the wife sold both flats for ₹5.98 crore.
She computed Long-Term Capital Gains (LTCG) of ₹4.21 crore and claimed Section 54 exemption by reinvesting ₹3.85 crore into a property owned by her husband.
The Income Tax Department objected, calling the transaction a colorable device due to fund rotation and ownership ambiguity.
ITAT Mumbai, in its June 2025 judgment, ruled in favor of the taxpayer, upholding the exemption.

Why This Tax Strategy Fails for US NRIs

US Tax Law Is Based on Worldwide Income
If you are a US tax resident, i.e., a US citizen or green card holder, the IRS taxes your global income under IRC Section 61. This includes capital gains from sale of Indian property—even if exempt under Indian Income Tax laws.

Aspect	India	United States
Capital Gains Exemption	Section 54 available if reinvested	No such exemption under US tax code
Gift from Spouse	No tax; title passes via gift deed	Gifted basis applies; may lead to higher gains
Fund Rotation	May be accepted if documented	Could trigger IRS audit if substance lacking

How US NRIs Must Report Indian Property Sales

Report LTCG in Form 1040
All capital gains on Indian property must be disclosed on your US tax return (Form 1040). You cannot use India’s Section 54 exemption under US tax laws.

Even if the property was gifted, the original cost basis (your spouse’s purchase price) is used, which increases the taxable gain.

Key IRS Rule: If you sell property received as a gift, your cost basis = donor's original purchase price (plus improvements), not the value on the date of the gift.

Claim Foreign Tax Credit (Form 1116)

You may claim a foreign tax credit for the taxes paid in India on capital gains using IRS Form 1116 under:

IRC Section 901
Article 25 of the India–US Double Tax Avoidance Agreement (DTAA)

But note: If you don’t pay tax in India (because of Section 54 exemption), you cannot claim any credit in the US either. You’ll end up paying full US tax on the gain.

Disclose NRO/NRE Accounts – FBAR & FATCA Compliance
Once the sale proceeds are deposited in your NRO account, you may trigger US informational filing requirements.

Form	When Required	Purpose
FBAR (FinCEN 114)	If total foreign accounts > $10,000 at any time	Disclose Indian bank accounts (NRO/NRE/FDs etc.)
Form 8938 (FATCA)	If foreign assets > $50,000 (single) or $100,000 (MFJ)	Report foreign financial assets

✅ Even if no money is repatriated to the US, just holding these accounts can create reporting obligations.

Real Risks for US NRIs Using Section 54

Let’s say you're a US-based NRI trying to replicate this strategy:

You sell Indian property (gifted or purchased)
Claim Section 54 exemption by reinvesting in another Indian house
Avoid Indian tax legally

Big mistake for US tax purposes:

No exemption in the US.
IRS may question gift documentation, fund rotation, or sham transactions.
You still owe full US capital gains tax.
Missed FBAR or FATCA filings = huge penalties (up to $10,000+ per violation).

Best Practices for US-Based NRIs Selling Indian Property

Don’t assume Indian exemptions work in the US
Consult experts on cross-border tax coordination.

Document everything
Keep detailed gift deeds, sale agreements, and fund flows to support IRS reporting.

File Form 1040 with capital gains
Include sale of foreign property under Schedule D.

File Form 1116 for foreign tax credit
Only if you actually paid tax in India.

Disclose foreign accounts properly
Avoid FBAR/FATCA penalties by declaring NRO/NRE balances.

Plan Repatriation & Tax Withholding
Coordinate with your CA for Form 15CA/CB and TDS deduction or more under Indian rules.

Final Word from Dinesh Aarjav & Associates

While the ITAT Mumbai ruling is a landmark win for resident Indian taxpayers, US-based NRIs must be extremely careful before applying similar real estate tax strategies.

At Dinesh Aarjav & Associates, we specialize in India–US cross-border taxation, selling nri property in india, guiding NRIs, PIOs, and returning residents through: