US NRI Guide to Selling Indian Ancestral Property in 2026

Key Takeaways

• New Governing Law: As of April 1, 2026, all property transactions are governed by the new Income-tax Act, 2025, which replaces the erstwhile Income-tax Act, 1961. This new act aims to simplify and modernize tax compliance.
• Mandatory TDS on Full Value: The buyer of your property is legally required to deduct Tax at Source (TDS) under Section 393(2) of the new Act (successor to Section 195). Crucially, this TDS is calculated on the entire sale consideration, not just the capital gains, which can result in a significant upfront deduction.
• Lower TDS Certificate is Essential: To prevent excessive tax withholding, the most critical step for an NRI seller is to apply for a Lower or Nil TDS Certificate (now via Form 128) from the Income Tax Department before the sale. This certificate authorizes the buyer to deduct TDS at a reduced rate based on the actual estimated capital gains.
• Repatriation Capped at USD 1 Million: NRIs can repatriate (transfer to the US) up to USD 1 million per financial year (April-March) from their NRO account, where the sale proceeds must be deposited. This process requires strict documentation, including Forms 15CA and 15CB, to certify that all Indian taxes have been paid.

PART 1: EXECUTIVE SUMMARY

This guide addresses the significant shift in India's direct tax regime and its direct impact on US-based NRIs liquidating ancestral property. The tax year 2026 marks the first year of a new legislative era, demanding updated compliance strategies.

• The Old Law (Income Tax Act, 1961): For over six decades, NRI property sales were governed by the 1961 Act. Under this framework, long-term capital gains were taxed at 20% with the benefit of "indexation," which adjusted the purchase price for inflation, thereby reducing the taxable gain. Tax deduction at source (TDS) was a complex obligation for the buyer under Section 195, and repatriation was managed under the Foreign Exchange Management Act (FEMA).

• The New Law (Income-tax Act, 2025): Effective from Assessment Year 2027-28 (Financial Year 2026-27), the Income-tax Act, 2025, simplifies the previous structure. A key change for property is the altered capital gains tax calculation for NRIs. The tax rate for long-term capital gains is now set at 12.5% (plus surcharge and cess), but the indexation benefit has been removed. The Act also streamlines compliance by eliminating the need for resident buyers to obtain a TAN to deposit TDS for NRI sellers, effective October 1, 2026.

• Who is Impacted: This transition directly affects all Non-Resident Indians, particularly those residing in the US, who plan to sell inherited or ancestral property in India. The changes to TDS rules, capital gains computation, and compliance forms necessitate a proactive approach to tax planning to ensure seamless repatriation of funds and avoidance of double taxation under the India-US DTAA.

PART 2: DETAILED TAX ANALYSIS

1. Background for Non-Resident Indians

For a US NRI, selling ancestral property in India involves navigating a dual legal framework: Indian tax law for the transaction itself and US tax law for reporting the worldwide income.

Defining Ancestral Property: Ancestral property is, broadly, property inherited up to four generations of male lineage. For tax purposes, the critical aspect of inherited property is determining its cost of acquisition and period of holding.

• Cost of Acquisition: For property inherited, the cost is not its value on the date of inheritance. Instead, it is the cost at which it was acquired by the original owner. If the property was acquired by the original owner before April 1, 2001, the NRI has the option to use the Fair Market Value (FMV) of the property as on that date as the cost.
• Period of Holding: To determine if the gain is long-term or short-term, the holding period includes the duration for which the property was held by the previous owner(s). For real estate, a holding period of more than 24 months qualifies it as a long-term capital asset.

Given that ancestral properties are often held for decades, nearly all such sales result in Long-Term Capital Gains (LTCG).

2. Comparison: 1961 Act vs Income-tax Act 2025

The new Act introduces fundamental changes to how capital gains are taxed for NRIs. While aiming for simplification, these changes require careful financial planning.

Analysis of the Change: The shift from a 20% tax with indexation to a 12.5% flat tax without indexation has major consequences. For properties held for a very long time, the removal of the indexation benefit may lead to a higher tax liability despite the lower rate.

• Example: Property bought in 2002 for ₹10 Lakhs, sold in 2026 for ₹1.5 Crores.
  • Old Act (with notional indexation): Indexed cost might be ~₹35 Lakhs. Taxable gain = ₹1.15 Crores. Tax @20% = ~₹23 Lakhs.
  • New Act (no indexation): Taxable gain = ₹1.4 Crores. Tax @12.5% = ₹17.5 Lakhs (plus surcharge/cess). In this scenario, the new Act is beneficial. However, for properties with a much higher appreciation over a longer period, the absence of indexation can make the new regime more costly.

3. Repatriation & DTAA Implications

FEMA & Repatriation: The repatriation of funds from India to the US is governed by the Foreign Exchange Management Act (FEMA) and RBI regulations.

1. NRO Account is Mandatory: The sale proceeds must first be credited to the NRI's Non-Resident Ordinary (NRO) rupee account in India.
2. USD 1 Million Cap: An NRI is permitted to repatriate up to USD 1 million per financial year (April 1 - March 31) from their NRO account balance. This limit includes all capital account remittances.
3. Forms 15CA & 15CB: For any remittance exceeding ₹5 Lakhs, these forms are mandatory.
   • Form 15CB: A Chartered Accountant must certify the transaction, detailing the source of funds, the calculation of capital gains, and confirming that applicable taxes have been duly paid.
   • Form 15CA: This is a declaration filed online by the NRI based on the CA’s certificate in Form 15CB. Banks will not process the outward remittance without the successful filing of these forms.

India-USA DTAA (Double Taxation Avoidance Agreement): The DTAA is crucial to prevent the same income from being taxed in both countries.

• Taxing Rights: As per Article 13 of the India-US DTAA, capital gains arising from the sale of immovable property are taxable in the country where the property is situated. Therefore, India has the primary right to tax the capital gains from the sale of Indian property.
• Reporting in the US: A US resident (including a Green Card holder) is taxed on their worldwide income. The sale of the Indian property must be reported on the US tax return (Schedule D and Form 8949).
• Foreign Tax Credit (FTC): To avoid double taxation, the NRI can claim a foreign tax credit in the US for the taxes paid in India by filing Form 1116. This credit typically offsets the US tax liability on the same income, ensuring the income is not taxed twice.

4. NRI Action Plan & Documentation

A systematic approach is essential for a compliant and efficient transaction.

Phase 1: Pre-Sale Preparation (Crucial)

1. PAN Card: Ensure your Permanent Account Number (PAN) is active and linked with Aadhaar if applicable.
2. Valuation: If the property was acquired by the original owner before April 1, 2001, obtain a valuation report from a registered valuer to establish the FMV as of that date.
3. Apply for Lower TDS (Form 128): This is the most critical step. At least 30-45 days before the sale agreement, file an application in Form 128 with the jurisdictional Assessing Officer, providing details of the sale, the cost of acquisition, and the computed capital gains. The officer will issue a certificate directing the buyer to deduct TDS at a specific lower rate.

Phase 2: At the Time of Sale

1. Sale Deed: Ensure the sale agreement clearly states the sale consideration and other terms.
2. TDS Deduction: Provide the buyer with a copy of the lower TDS certificate. The buyer will deduct tax at the specified rate and deposit it with the government.
3. Receive TDS Certificate: The buyer must provide you with a TDS certificate (equivalent of old Form 16A) as proof of tax paid on your behalf.

Phase 3: Post-Sale Compliance

1. File Indian Income Tax Return (ITR): It is mandatory to file an ITR in India for the financial year of the sale. Report the capital gains, claim the TDS deducted, and pay any balance tax. If excess TDS was deducted, this is the mechanism to claim a refund.
2. Repatriation:
   • Engage a Chartered Accountant to issue Form 15CB.
   • File Form 15CA online.
   • Submit both forms along with a remittance application to your NRO bank.
   • Maintain copies of the sale deed, TDS certificate, and tax filing acknowledgments for the bank.

Documentation Checklist:

• PAN Card of the seller.
• Original purchase deed of the property (from the first owner).
• Inheritance documents (e.g., Will, Succession Certificate).
• Sale Agreement with the buyer.
• Valuation Report (if applicable).
• Lower TDS Certificate (Form 128).
• TDS payment challans and certificate from the buyer.
• Filed Indian Income Tax Return.
• Form 15CA and Form 15CB for repatriation.

5. Conclusion

The transition to the Income-tax Act, 2025, represents a significant overhaul of India's tax landscape. For US NRIs selling ancestral property, the new law's removal of the indexation benefit while lowering the LTCG tax rate demands a fresh evaluation of tax liability. Proactive compliance, especially obtaining a lower TDS certificate via Form 128, is no longer just advisable—it is essential to protect cash flow. By meticulously following the updated tax and FEMA regulations and correctly leveraging the India-US DTAA, NRIs can ensure a legally compliant transaction, avoid excessive tax withholding, and achieve a smooth repatriation of their funds.

💡 NRI Tax Tip: Managing foreign assets or DTAA? Ensure you are compliant with the updated NRI taxation rules in 2025.