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US Tax

US Estate and Gift Tax for Indian Families: A Guide

One family, three family members, three very different US tax positions. A US citizen has a US$15 million exemption. An Indian resident holding the same US shares has US$60,000.

By Vasu Patel, Deputy Manager, M&A

Published 11 November 202611 minDownload PDF

This guide draws on KCM Heirloom, 8th edition. Download the full edition: Practical Guide on US Estate and Gift Tax (PDF).

Key Takeaways

  • US estate and gift tax turns on citizenship and domicile, not on income tax residence. A person can be a US income tax resident without being US domiciled, and the other way round.
  • An Indian resident who is not a US citizen is taxed only on US-situs assets (US shares, US-listed ETFs and funds, US real estate) and has an exemption of just US$60,000. Above that, rates reach 40%.
  • A US citizen is taxed on worldwide assets but has an exemption of US$15,000,000 for 2026.
  • An Indian resident can generally gift US shares during life without US gift tax, but the same shares held until death are caught by estate tax. That asymmetry is one of the most useful planning levers.
  • A returning green card holder can face an exit tax on giving up the card, and every later gift or bequest from them to a US person can attract a 40% tax paid by the recipient.

Meet the Sheth family

Mr. Sheth is an Indian citizen living in Mumbai. He has built a textile business and holds part of his wealth in US-listed shares through an offshore brokerage account. He also owns a small apartment in New York for family visits. His son Karan studied in the US, obtained a green card and has moved back to India to join the family business. His daughter Priya lives in the US and is a US citizen, as is her husband.

To an Indian eye this is an ordinary global family. For US estate and gift tax, each of them sits in a different category.

Two US tax systems, two connecting factors

Income tax Estate and gift tax (transfer tax)
What it taxes Income as it is earned Wealth passing on death (estate tax) or during life (gift tax)
Connecting factor Citizenship, green card or physical presence Citizenship or domicile
Top federal rate 37% 40%
Who is taxed on worldwide items US citizens and US income tax residents US citizens and US domiciliaries
Non-citizen, non-domiciled persons US-source income only US-situs assets only

Domicile is a question of fact. It means the place a person treats as a permanent home, with no intention of leaving. There is no day-count test. US regulations look at all the facts: where the family lives, where the person’s home and personal effects are, business ties, voter and driving registrations, and stated intentions.

Scenario 1: Mr. Sheth and the US$60,000 trap

Mr. Sheth is neither a US citizen nor US domiciled. He is a nonresident non-citizen (NRNC) for US estate tax. Only his US-situs assets are taxed, but his exemption is a unified credit of US$13,000 (IRC section 2102(b)), which shelters only the first US$60,000. That figure has not changed since 1988 and is not indexed.

US-situs for an NRNC: shares of US companies (wherever the shares are held or the account is kept), US-listed ETFs and mutual funds, and US real estate. Generally not US-situs: shares of non-US companies, US bank deposits not connected with a US business, certain debt instruments, and life insurance proceeds on the NRNC’s own life.

Routing Apple shares through a Singapore or Dubai brokerage does not change the answer. The situs of a share follows the place of incorporation of the company.

Worked example: what Mr. Sheth’s estate pays

Assume Mr. Sheth dies holding US$2,000,000 of US-listed shares and a New York apartment worth US$1,000,000. For simplicity, no deductions are claimed.

Step Amount (US$)
US-situs estate 3,000,000
Tax on the first 1,000,000 (rate schedule, IRC section 2001(c)) 345,800
Tax on the next 2,000,000 at 40% 800,000
Tentative tax 1,145,800
Less unified credit for an NRNC (13,000)
US federal estate tax 1,132,800

That is 37.8% of the US assets, payable before the shares can be released to the heirs. The executor files Form 706-NA, generally within nine months of death, whenever the US-situs gross estate exceeds US$60,000. New York also has its own estate tax, which can apply to New York real property owned by a nonresident. On shares alone the same arithmetic is covered in US Estate Tax on US Shares: The USD 60,000 Trap.

The gift tax asymmetry

US gift tax does not apply to an NRNC’s gifts of intangible property, such as shares of a US company (IRC section 2501(a)(2)). So Mr. Sheth can gift his US shares to his children during his lifetime with no US gift tax. If he holds the same shares until death, they are subject to estate tax.

US real estate is different. A gift of the New York apartment is a taxable gift even for an NRNC, and an NRNC has no lifetime gift exemption. Only the annual exclusion of US$19,000 per recipient for 2026 is available.

Scenario 2: Priya, the US citizen

Priya is taxed on her worldwide assets, including any Indian shares, property and family business interests she owns. Her exemption is far larger: US$15,000,000 for 2026, fixed by the One Big Beautiful Bill Act and indexed for inflation from 2027. Any unused part can pass to a surviving US citizen spouse (portability).

Step-up in basis. Assets Priya inherits generally take a new tax cost equal to their market value at the date of death. If Mr. Sheth’s Indian shares cost US$100 and are worth US$500 when he dies, Priya’s basis becomes US$500, and she is taxed only on growth above that. A lifetime gift usually carries the donor’s original basis instead, so the timing of a transfer matters.

Reporting: Form 3520. If Priya receives more than US$100,000 in a calendar year as gifts or bequests from a nonresident alien individual or a foreign estate, she must report it on Form 3520. No tax is due on the gift itself, but the penalty for not reporting is 5% of the amount for each month it goes unreported, up to 25%.

Scenario 3: Karan, the returning green card holder

For estate and gift tax, Karan’s green card is not decisive. Domicile is.

  • If Karan has genuinely moved back (family, business and home in India, no intention to return to the US), he may no longer be US domiciled. Only his US-situs assets would then be exposed, as for his father.
  • If his US connection remains strong, the US may treat him as domiciled, and his worldwide assets are within US estate tax.

For income tax, a green card holder generally remains a US tax resident until the card is formally given up, wherever he lives.

The exit tax

When Karan gives up his green card, he is a “long-term resident” if he held it in at least 8 of the last 15 tax years. He is then a covered expatriate if he meets any one of three tests on the expatriation date:

Test 2026 threshold
Net worth US$2,000,000 or more
Average annual net US income tax for the 5 preceding years More than US$211,000
Tax compliance Fails to certify 5 years of US tax compliance on Form 8854

A covered expatriate is treated as having sold all worldwide assets at market value the day before expatriating (IRC section 877A). The first US$910,000 of net gain is excluded for 2026.

Worked example. Karan’s worldwide assets carry an unrealised gain of US$1,500,000, all long-term. Taxable deemed gain is US$1,500,000 less US$910,000, or US$590,000. At 20% plus the 3.8% net investment income tax, the exit tax is US$140,420. Retirement accounts are dealt with separately and can be taxed at ordinary rates up to 37%.

The longer tail is IRC section 2801. Every later gift or bequest from a covered expatriate to a US citizen or resident is taxed at 40%, paid by the recipient, after the annual exclusion. If Karan later gifts US$500,000 to Priya, she would pay 40% of US$481,000 (US$500,000 less the US$19,000 exclusion), or US$192,400.

The non-US citizen spouse

Between two US citizen spouses, transfers are generally free of estate and gift tax. Where the surviving spouse is not a US citizen, the unlimited marital deduction does not apply. Lifetime gifts to a non-citizen spouse are sheltered only up to US$194,000 for 2026.

A Qualified Domestic Trust (QDOT) can defer the estate tax until principal is distributed or the surviving spouse dies (IRC section 2056A). It defers the tax; it does not remove it. See QDOT planning.

In a nutshell

Issue US citizen or US domiciliary Green card holder in India, not US domiciled Indian resident, non-US citizen
Assets exposed on death Worldwide US-situs only US-situs only
Estate tax exemption (2026) US$15,000,000 US$60,000 US$60,000
Gift tax applies to Worldwide gifts US real estate and tangible property in the US US real estate and tangible property in the US
Gift of US shares Within gift tax Generally outside US gift tax Generally outside US gift tax
Annual exclusion (2026) US$19,000 per recipient US$19,000 per recipient US$19,000 per recipient
Gifts to a non-citizen spouse (2026) Up to US$194,000 a year Up to US$194,000 a year Up to US$194,000 a year

What families can do

  • Hold US investments through a non-US company. Shares of a non-US company are not US-situs for an NRNC. The company’s own tax, substance and anti-abuse position must be checked. See US estate tax blockers.
  • Use trusts for the next generation. For US citizen children, an irrevocable trust settled by Indian parents can keep assets outside the children’s future US taxable estates. Foreign trust rules are technical and need careful drafting.
  • Gift US shares during life. An Indian parent can gift US-listed shares without US gift tax, instead of holding them until death. Weigh the loss of step-up in basis for the recipient.
  • Life insurance for liquidity. Proceeds on an NRNC’s own life are not US-situs, so insurance can fund any residual estate tax.
  • Review before you act. Check the position before buying US real estate or building a large US portfolio, moving into or out of the US, giving up a green card or US citizenship, or making a large cross-border gift. See US pre-immigration planning.

FAQ

Does holding US shares through an Indian or Dubai broker avoid US estate tax?
No. The situs of a share follows where the company is incorporated, not where the account is kept. Shares of a US company are US-situs for an Indian resident whatever the broker.

Is a US-listed ETF a US-situs asset?
Yes. A fund organised in the US is a US-situs asset for an NRNC. An Irish-domiciled ETF is generally not; see US Estate Tax on US Shares.

Does the India-US tax treaty protect against US estate tax?
No. The India-US treaty covers income tax only. India and the US have no estate tax treaty.

Does Priya pay tax when she inherits from her father in India?
Not in the US on the inheritance itself, and India has no inheritance tax. She must report bequests above US$100,000 in a year on Form 3520, and she generally takes a stepped-up basis.

Can a green card holder living in India be outside US estate tax?
On worldwide assets, possibly, if he is no longer US domiciled. That is a question of fact. His US-situs assets remain exposed in any case, and for income tax he remains a US resident while he holds the card.

Talk to KCM’s US tax team about your family’s US exposure: contact us.

Sources and last checked: 9 November 2026

This is not to be construed as legal advice. The actual advice will depend upon the facts and will have to take into consideration the case-specific facts and the anti-abuse regulations.

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