@DABU , yes you are correct in that India uses an indexing of the basis for purposes of computing gain of an asset
(a) In your particular case, it is best that you complete the Indian tax filing first and settle that before you do the US tax return. The reason for this is to avoid having to amend the US return if Indian IT dept. changes the tax liability --- I am aware that a 20% of the computed gain is the tax and is collected at source. Also there is the issue of Tax year difference between India ( Apr. 1st through 31st. March next calendar year ) and the USA ( Calendar year).
(b) For US purposes there is no indexation applied to the basis. Basis is defined as Acquisition cost plus cost of any improvements. The only time FMV is used as the cost basis is in case of acquisition by inheritance and it is the FMV at the time of death of the decedent or soon thereafter. I am assuming here that you acquired the property by purchase. Note that you will have to use the exchange rate at the time of each transaction. Thus if you bought the property in 1980, then you use the actual exchange rate ( from bank / published by RBI/ US Treasury ) at that time. Ditto for any improvements .
(c)For US purposes , the use of the asset while being held by you is germane --- so if you had some income from the asset during the period held, this should have been recognized on your US return and any allowable depreciation/ depletion ( not valid for land of course unless there is extraction of valuables like gas, oil, rocks, mining etc. ) reduces the basis , increases the gain and is subject to recapture ( taxed as ordinary income ).
(d) Also note that the gain that is treated as Capital gain will be taxed by the US under its rules/laws ( unless limited by tax treaty )
(e) Assuming you choose to take advantage of foreign tax credit, when filling out the form 1116, you need to be sure to answer the questions carefully because the foreign gain most likely will be different than the US gain and this creates a conundrum as to the definition of the foreign income/gain.
Is there more I can do for you ?
Namaste
pk
