Demystifying the Tax Maze: Taxation of Foreign ESOPs in India
Employee Stock Ownership Plans (ESOPs) are a popular benefit offered to employees worldwide. For Indian employees working in overseas parent companies, the taxation of foreign ESOPs in India can be complex. This article explains the key regulations and how to navigate the taxation of foreign ESOPs in India with clarity.
Understanding the Tax Implications of Foreign ESOPs
The tax treatment of foreign ESOPs in India depends on the employee’s residential status and when the ESOP transactions occur. Here’s a breakdown of how this works:
1. Grant of ESOPs: No Immediate Tax Liability
When an employee receives foreign ESOPs, they do not incur immediate tax liability. The grant of the options itself doesn’t trigger tax obligations.
2. Exercise of ESOPs: Perquisite Taxation
When employees exercise their foreign ESOPs, they purchase shares at a discounted price. The difference between the exercise price and the fair market value (FMV) at the time of exercise is considered a perquisite. This amount is taxed under the Salaries head. The employer must deduct tax at source (TDS) on this perquisite.
This tax can impact the employee’s salary tax bracket, so it’s essential to plan carefully.
3. Sale of Shares: Capital Gains Tax
After exercising their foreign ESOPs, employees can sell the acquired shares. The difference between the sale price and FMV at the time of exercise is taxed as capital gains. The tax rate depends on the holding period:
- Short-Term Capital Gains (STCG): If the shares are sold within 24 months, the capital gains are taxed at the individual’s applicable income tax slab.
- Long-Term Capital Gains (LTCG): If the shares are held for over 24 months, the gains are taxed at 12.5% without indexation.
For foreign ESOPs, whether the shares are listed or unlisted also affects taxation.
4. Double Taxation Avoidance Agreement (DTAA)
India has signed Double Taxation Avoidance Agreements (DTAAs) with many countries to prevent double taxation. These agreements help determine how income from foreign ESOPs is taxed both in India and the employee’s country of residence. DTAAs reduce the burden of paying tax twice.
Legal Aspects: FEMA and Income Tax Act, 1961
The taxation of foreign ESOPs in India is governed by:
- Foreign Exchange Management Act (FEMA): FEMA regulates how employees in India can receive shares from foreign companies.
- Income Tax Act, 1961: This Act details the tax treatment of foreign ESOPs. Employees must comply with the tax reporting requirements under this Act.
The Reserve Bank of India (RBI) and the Central Board of Direct Taxes (CBDT) provide guidelines for foreign ESOP taxation.
Recent Judgments: Clarifying Taxation Rules
A recent case, Pratibha Sharma vs. ACIT [2020], clarified how to disclose foreign ESOPs. The Income Tax Appellate Tribunal (ITAT) ruled that non-disclosure of foreign assets, including ESOPs, could lead to penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. This case emphasises the need for accurate reporting of foreign ESOPs in tax returns.
Key Considerations for Indian Employees with Foreign ESOPs
If you hold foreign ESOPs, here’s what you should keep in mind:
- Residential Status: Your residential status is crucial in determining your tax liability. Residents and Resident but Not Ordinarily Resident (RNOR) employees are taxable on their global income, including foreign ESOPs.
- Record-Keeping: Keep detailed records of your foreign ESOPs, such as:
- Grant date
- Exercise price
- FMV on exercise date
- Sale price
- Taxes paid abroad
This will simplify tax calculations in India.
- Consulting Tax Professionals: Since foreign ESOPs taxation can be complex, seek advice from tax experts. They can help you understand the rules and minimise your tax burden.
Outlook: Navigating the Taxation of Foreign ESOPs in India
The taxation of foreign ESOPs in India is evolving. Staying updated on the latest regulations and seeking professional help will ensure you comply with tax laws while optimising the benefits of foreign ESOPs.
LawCrust: Your Trusted Partner for Foreign ESOPs Taxation
LawCrust Legal Consulting Services and LawCrust Global Consulting Ltd is a leading law firm offering expert legal services in India, including in Mumbai, Kolkata, Bangalore, Delhi, and internationally in Dubai. We specialise in Litigation Finance, Litigation Management, NRI Legal Services, Startup Solutions, and more. Our team can help you navigate the taxation of foreign ESOPs in India with ease.
For assistance with foreign ESOPs taxation or any other legal matters email bo@lawcrust.com LawCrust at +91 8097842911 for a consultation.