Taxation of ESOPs you hold in foreign companies


If shares of a foreign company are allocated to you, then you are the owner of the foreign assets. First, you are required to disclose these foreign assets on your tax return if your residency status is “Resident of India”. ITR-2 or ITR-3 would be the right ITR forms for people holding foreign assets or earning income from foreign sources. The RTI form should be chosen based on the type of income earned during the year.

Under the Income Tax Act, salary received or accrued or generated in India by a “resident” is taxable in India. So, if you are a resident of India according to the Income Tax (IT) Act, you are liable to tax on the aggregate income earned. Thus, capital gains from disposal of shares of foreign companies are also taxed in India. This income may be taxed as short-term or long-term capital gains depending on how long it is held.

Let’s take several scenarios and understand how ESOPs are taxed if in case you are:

a) Working outside India for a startup or company that awarded you ESOPs but now you are back in India after changing companies here in India: If you own the shares (received as ESOPs) of the outside corporation, the tax liability will only arise when you sell those shares. Since these shares are not listed on a recognized stock exchange, the holding period criteria would be similar to those of an unlisted company, ie 24 months.

The retention period for shares is determined from the date of allocation or transfer of these shares. So if the shares are sold after 24 months of allocation, they will be taxed as long-term capital gains. Otherwise, the tax payable would be based on short-term capital gains.

The amount of the capital gain will be calculated as the consideration received on the sale of the shares minus the cost price of the shares.

The short-term capital gain would be taxable at normal tax rates applicable to you. However, long-term capital gains will be taxed at 20% with the benefit of indexation on the cost price of the shares.

b) Remote work for a company based in another country: If you earn income in India by working remotely for a company based in another country, you are liable for tax in India. The tax must be paid in two stages, namely the year of exercising the option and the year of selling the shares.

For the year in which the options are exercised, the difference between the fair market value (FMV) and the exercise price of the shares must be reported as perquisites under “salary income”, and tax should be calculated in accordance with the normal tax slab rates applicable to you. When the same shares are sold, the income should be taxed as short-term or long-term capital gains, depending on the period of ownership.

c) Working for a startup/company headquartered abroad and holding ESOPs in the parent company: Even if there is no direct employer-employee relationship with the parent company issuing the options, the difference between the FMV on the date of exercise and the exercise price will be considered a condition precedent. This is because the shares are granted by virtue of employment.

In addition, when you sell these shares, you are liable for tax based on short-term or long-term capital gains, as mentioned above. In all of the above cases, foreign countries may also tax these profits. Thus, the tax payable must be assessed in accordance with the local tax laws of the place of residence of the foreign company issuing the shares and related tax treaties (such as treaties for the avoidance of double taxation). Tax relief can be taken for tax already paid in the foreign country in accordance with the DTAA. Accordingly, Form 67 showing details of the foreign income and the tax paid thereon must be provided.

Archit Gupta is founder and CEO of Clear.in.

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