Mohali Home Sale Tax Paid In India Can Offset US Tax मोहाली मकान की बिक्री पर भारत में चुकाया टैक्स US टैक्स में घटेगा ਮੋਹਾਲੀ ਮਕਾਨ ਦੀ ਵਿਕਰੀ ਉੱਤੇ ਭਾਰਤ ਵਿੱਚ ਭਰਿਆ ਟੈਕਸ US ਟੈਕਸ ਵਿੱਚ ਘਟੇਗਾ

A Mohali flat sold by an owner who lives in California or New Jersey is taxed on two returns. India takes its share first, through the tax the buyer deducts from the price before the money is paid. The United States then counts the same gain on the owner's federal return. It taxes its citizens and green card holders on income from anywhere in the world. The relief that keeps the gain from being taxed in full twice is the foreign tax credit, claimed on Form 1116.

The credit works. It just does not line up neatly with the Indian side. The two countries run different tax years and measure the gain in different currencies, and those gaps decide how much of the Indian tax an owner in America can set against the American bill in the year of the sale.

The treaty leaves both countries free to tax

India and the United States have a tax treaty, and its article on capital gains is short. Each country "may tax capital gains in accordance with the provisions of its domestic law". India keeps its full right to tax the sale of a home or plot inside India. The United States keeps its right to tax its own citizens and residents on the same sale.

The relief comes in a later article on double taxation. There the United States agrees to allow its citizens and residents a credit against American tax for the income tax paid to India, subject to the limits of American law. The treaty sets the principle. The working rules sit in the IRS instructions for Form 1116 and in the IRS guide to the foreign tax credit, both revised for the returns now being prepared for the current year.

None of this touches a seller who lives in Mohali. A resident files a single Indian return and the question never comes up. It is the seller's American citizenship or residence that brings in the second return, and with it the second set of rules.

India's share is taken at the sale

When the seller is a non-resident, the buyer deducts tax from the price before paying it over. Since the first of October that deduction is reported on a new statement filed with the buyer's PAN, and it is credited against the seller's Indian tax. Our report on [the new filing rule for buyers](/article/348-selling-a-mohali-property-from-abroad-the-new-tds-filing-rule-for-buyers) covers how the buyer's side works.

The deduction is an estimate. The buyer works it out without the seller's full computation, and often on more than the true gain when no certificate for a lower deduction has been obtained. The seller's real Indian tax is settled only when an Indian return is filed for the year. Our piece on [a Mohali home sold from abroad](/article/407-mohali-home-sold-from-abroad-gets-no-indexation-choice) explains why a non-resident selling a long-held home now pays the flat rate with no indexation choice.

That gap between the deduction and the real tax matters on the American return. The Form 1116 instructions exclude any foreign tax the taxpayer does not legally owe, and they say that includes amounts eligible for refund. If the buyer in Mohali deducted more than the Indian tax finally due, the excess is a refund claim in India. It does not count toward the credit even if the refund is never claimed.

The American return counts in dollars

Every figure on the American return is in dollars. The IRS guide for citizens and residents abroad says amounts in a foreign currency have to be converted, and that the method depends on the taxpayer's functional currency, which for most individuals is the dollar. For a Mohali home bought years ago, the purchase cost and the sale price are each turned into dollars, so the gain in dollars can differ from the gain in rupees that India taxes.

The Indian tax is converted too. A tax claimed when it is paid is converted at the exchange rate on the day of payment. A tax claimed on the accrual basis generally uses the average exchange rate for the tax year it relates to. On a large sale, the choice of method alone can move the credit.

Two tax years that do not match

India's tax year runs from April to March. The American year is the calendar year. A Mohali sale in February falls in an Indian year that closes at the end of March, while the American return for that calendar year is due in April. Citizens living abroad get an automatic two months more, to the fifteenth of June, though interest still runs on any tax paid after the April date.

The IRS guide is clear about which year governs. Its tax year means the year of the American return, and it notes that accrued foreign taxes generally arise at the close of the foreign tax year.

The timing problem follows from there. An owner on the cash method takes the Indian tax in the year it is paid, which for the deducted part is the year of the sale. A balance paid later with the Indian return, or a refund that comes back, changes the Indian figure after the American return is in. The instructions treat that as a foreign tax redetermination, and they generally require an amended American return when it happens. On the accrual method the tax belongs to the year it relates to, and an accrued tax that stays unpaid for twenty four months has to come back off the credit.

The credit has a ceiling

The credit can never exceed the American tax on the foreign income. The IRS guide puts the limit in one line: the credit "cannot reduce U.S. taxes on U.S. source income". When India's tax on the gain is higher than the American tax on the same gain, the extra is carried back one year first and then forward to the ten years that follow.

Carrying it forward only helps if there is room to use it. The instructions sort foreign income into categories, and they state that "Capital gains not related to the active conduct of a trade or business are also generally passive income." A Mohali flat held as an investment, or left locked while the family lives abroad, sits in that passive category. The Indian tax on its sale can then be set only against American tax on passive foreign income, such as interest from an NRO account in the same years.

There is a second squeeze. Gains taxed at the lower American rates for long-held assets are scaled down before the limit is worked out, which shrinks the room for the credit in the year of sale.

The other route is to deduct the Indian tax as an itemised deduction instead of taking the credit. The IRS guide allows either for a given year and suggests working out the tax both ways.

When the Mohali home was the main home

A smaller group of owners can keep part of the gain off the American return altogether. The exclusion for the sale of a main home asks that the home was owned for at least twenty four months out of the five years before the sale and lived in for a total of the same length, which need not be continuous. It covers the first two hundred and fifty thousand dollars of gain, or five hundred thousand dollars for a married couple filing jointly.

The publication frames these tests around ownership and residence and does not limit them to homes inside the United States. Few owners who moved to America long ago pass the residence test on a flat they left behind in Sector Seventy or Aerocity. Some who came back to live in it for a stretch before selling may. The test turns on days of residence, and the record of those days is the owner's own.

The papers come from India

The credit rests on proof of the Indian tax. That proof starts with the buyer's certificate for the tax deducted and the seller's own Indian return showing the final tax for the year. The American return does not ask India for anything directly. It relies on what the seller can show.

The sale money itself is a separate matter. Moving it out of an NRO account follows India's foreign exchange rules, set out in our piece on [taking Mohali sale money abroad](/article/356-taking-mohali-sale-money-abroad-how-nri-repatriation-works-now). While it sits in that account, it also counts for the American bank account report covered in our report on [Mohali rent in an NRO account and FBAR](/article/397-mohali-rent-in-an-nro-account-must-be-reported-on-fbar).

The open point

On a sale made this winter, the Indian tax will often not be final until the Indian return is filed after March. The American return for the same calendar year is due by April, or by the middle of June for those abroad. Many sellers will file in America before the Indian figure is settled and then amend once it is. Which way the credit moves turns on the Indian computation, and the IRS instructions set no separate rule for the sale of a home abroad.

Sources: The sources we use are listed on our Editorial Sources page.

This piece explains how the American foreign tax credit treats Indian tax on the sale of a Mohali home. It gives no tax or legal advice, and the tax on any sale turns on the seller's own facts and filings in both countries.