It’s a general practice in organizations to give employee stock options (ESOPs) — shares of the company at a lower price than their fair value — to retain workers. It’s common among the Indian subsidiaries of foreign companies as well. But the joy of receiving ESOPs may fizzle out soon when employees need to pay tax as per the Income Tax Act in India.
The entire global income of a tax resident of India is taxable in India (irrespective of source), said Archit Gupta, founder and CEO, Clear. For the purpose of the Income Tax Act, a person qualifies as a resident if he stays in India for 182 days or meets some other conditions of stay in the four preceding years.
Neeraj Agarwala, partner, Nangia Andersen LLP, said, “As per the tax laws, any form of compensation or benefit received by an employee for services rendered in India would be taxable in India irrespective of where and in what form the compensation or benefit is received."
Tax treatment
The tax treatment for ESOPs given by foreign entities is not very different from how the ESOPs from Indian entities are taxed (For a detailed story on taxing ESOPs from Indian entities, check here. “The first trigger of taxation in the hands of a resident employee entitled to ESOPs in a foreign company would be the event of exercise of ESOPs," said Sandeep Jhunjhunwala, partner, Nangia Andersen LLP.
The differential between the fair value of shares allotted and the amount paid by an employee would be taxed as perquisite in the hands of the resident employee.
At the time of sale, the gains are considered capital gains and are taxed in India.
The period of holding for foreign shares for the purpose of the tax is 24 months. Short-term gains are taxed at slab rates, while long-term gains are taxed at 20% with indexation benefit (revising the cost of acquisition after considering inflation).
Compliance
ESOPs from foreign companies may also be taxed in the country in which the shares are listed or the company is headquartered. In that case, you can claim a refund. “In case the local rules of the foreign country taxes it, you can claim benefits under DTAA (Double Taxation Avoidance Agreement)," said Gupta.
Agarwala added, “Typically as per the DTAA, ESOPs would be taxable only in the country where employment is exercised. In this case, it would be India. Therefore, in most countries (DTAA countries), no tax should be levied on the ESOPs granted. However, capital gains arising from the sale of the sales allotted would most probably be taxable in that foreign country."
Since shares of the foreign company constitute a foreign asset, the individual would be required to file either ITR2 or ITR3 depending on the income. “A pertinent point to note is that, as per Indian exchange control regulations, the sale proceeds of ESOPs should be repatriated to India within 90 days from the date of sale," said Agarwala. Otherwise, you may be charged some penalties.
