Clawback Question Raised Over NRI LTCG Tax Relief Under Section 10(38)

NRIs selling Indian shares in 2026 are again running into a familiar question: can India “take back” NRI LTCG tax relief through a Clawback in the same year the shares are sold?

The short news answer is that widely cited NRI relief provisions—Section 10(38), Section 115F, and Section 54EC—do not, on their face, describe a broad “clawback in the year of sale” for equity gains.

What they do contain are condition-based exemptions that can be denied if you do not meet the conditions.

That distinction matters more than ever for NRIs who also have U.S. filing exposure, including investor-visa families (E‑2, EB‑5) who become U.S. tax residents under the green card test or the substantial presence test.

Once you are a U.S. tax resident, the U.S. generally taxes worldwide income, including capital gains from India, even if India grants an exemption.

For U.S. residency rules, the IRS points readers to Publication 519, U.S. Tax Guide for Aliens (Publication 519 PDF) and its international hub (International taxpayers).

(Information current as of February 4, 2026.)

What’s being debated: relief vs. “clawback”

Several provisions are commonly discussed in India as pathways to reduce or eliminate tax on long-term capital gains (LTCG).

The current confusion comes from mixing two ideas: an exemption that applies at sale (and fails if eligibility is not met) and a recapture concept (“clawback”) where an earlier benefit is reversed because a later condition was violated.

• An exemption that applies at sale (and fails if eligibility is not met)
• A recapture concept (“clawback”) where an earlier benefit is reversed because a later condition was violated

In the material summarized here, there is no explicit description of a standalone clawback that automatically triggers “in the year of share sale” for exempt equity LTCG.

Instead, the provisions operate through eligibility rules. If the rule is not met, the exemption does not apply.

Section 10(38): equity LTCG exemption tied to STT at sale

The most cited legacy equity exemption for NRIs is Section 10(38). It is described as an exemption on LTCG from equity shares or equity‑oriented fund units where Securities Transaction Tax (STT) is paid at sale.

In practical terms, that framing matters. If STT is a condition for the exemption, the “risk” is not a later clawback. The risk is a failed condition at the point of sale or reporting.

Because this is an India‑side rule, U.S. taxpayers should separate it from their U.S. treatment. If you are a U.S. tax resident in tax year 2026 (filed in 2027), you generally still report the sale on your U.S. return, even if India treats it as exempt.

Section 115F: exemption tied to reinvestment and a minimum holding period

Section 115F is commonly described as a reinvestment-based relief provision. The exemption is tied to gains from certain foreign currency assets if the gain is reinvested in specified assets.

Two details drive the “clawback” conversation: the exemption is described as proportional, and there is a 3‑year minimum holding period requirement.

This is the closest fact pattern to what taxpayers often call a clawback. If a benefit depends on holding an asset for three years, a later sale inside that window can cause the exemption to fail under the provision’s conditions.

The key point for cross-border filers is timing. India’s holding-period condition may be tested later, while the U.S. reporting happens each year based on U.S. rules.

Section 54EC: exemption up to ₹50 lakh through specified bonds

Section 54EC is described as an exemption of up to ₹50 lakh by investing in specified bonds (including NHAI, REC, PFC, and IRFC) within 6 months of a property sale.

This is not an equity-share exemption. It is typically discussed for property LTCG planning, but it is often grouped into “NRI LTCG relief” discussions.

If you are U.S. tax resident, the U.S. still expects reporting of the underlying sale. You may also need to evaluate how the bond investment is treated for U.S. purposes.

The missing link: what a true “clawback” would look like

A true clawback rule usually has clear triggers such as selling a replacement asset before a required holding period ends, or failing a reinvestment deadline after claiming a benefit.

In the summary provided here, there is no concrete mechanism identified that broadly claws back Section 10(38) equity-share exemptions “in the year of share sale.”

The concept is discussed, but without a specified statutory trigger.

⚠️ Warning: Do not assume “India exempt” means “U.S. tax‑free.” U.S. tax residents generally report worldwide income, including foreign capital gains.

U.S. reporting that often comes with Indian investments

NRIs who become U.S. tax residents frequently face extra reporting tied to India accounts and brokerage balances.

Quick reference: foreign account and asset reporting (U.S.)

FBAR is filed as FinCEN Form 114 (not with your tax return). Form 8938 is filed with your Form 1040 when required.

For IRS forms and instructions see IRS forms and publications.

Deadlines at a glance (U.S.)

FBAR is due April 15 with an automatic extension to October 15.

What to verify now (and what to watch)

Because the “clawback” claim is not established in the summary material, verification matters.

Action items for 2026 transactions:

1. Confirm which India provision you relied on. Identify Section 10(38), 115F, 54EC, or another section (including Sections 112 and 115F references).
2. Read the operative text in the Income Tax Act, 1961, and any official Income Tax Department guidance.
3. If you are U.S. tax resident in 2026, reconcile India results with U.S. reporting under IRS rules in Publication 519.
4. Track foreign account highs for FBAR ($10,000 aggregate) and Form 8938 thresholds.