Let us understand the taxatio of the sale of property in India (assuming this is not a rental property) as well as on th US tax return.
Say for e.g. you bought a house in India in the year 2000 for Rs. 5,000,000 ( approx $ 110,000 ). You sold this house in 2015 for Rs. 15,000,000 ( approx $ 223,880 ).
How will this transaction be taxed in India?
In India, the cost of acquisition will be increased by applying the cost inflation index. Once this cost inflation index is applied to the cost of acquisition, it becomes the indexed cost of acquisition.
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In our example, the cost inflation index in the year 2000 was 406 and in the year 2015 was 1081. Accordingly, the indexed cost of acquisition in our becomes ( 5,000,000 * 1081 / 406 ) Rs. 13,312,807. Since the selling price is Rs. 15,000,000, the capital gains will be Rs 15,000,000 less Rs. 13,312,807 or Rs. 1,667,192 ($24,883)
Now, there are various provisions in the Indian Income Tax Act, where if the capital gains are reinvested in another property, the individual is not subject to capital gains tax.
Let us now look at the US side of taxation.
US tax laws do not provide the benefit of indexation. So, as per the US laws, the capital gains on this house would be selling price less cost of acquisition ($ 223,880 – $ 110,000) i.e. $ 113,880. US tax laws also do not offer any provision by way of which the capital gains will be exempt from tax (exept 1031 exchange).
Therefore, in this example, although you were not liable to pay any capital gains tax in India, you will have to pay a tax in the US on your capital gains computed as per US laws.
