NRI’s Guide for ESOP Taxation in India

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As an NRI holding ESOPs from an Indian company, you may be liable to pay capital gains tax in India when you sell those shares. Your tax depends on how long you’ve held the shares and whether you exercised them while in India or abroad.

This guide explains how ESOP taxation works for NRIs and what you need to watch out for at each stage.

What are ESOP?

Employee stock ownership plan (ESOP) is a way for companies to incentivize its employees by providing shares of the company at a predetermined price. Holding employee shares can help build wealth as their value increases over time. NRIs can also claim benefits on their ESOP taxation under Double Taxation Avoidance Agreement (DTAA).

How Do They Work for NRIs?

If you're an NRI holding ESOPs from an Indian company, here's how the entire process typically works, from ESOPs grant to sale and repatriation of the funds.

1. Employers offer ESOPs at fixed price (also called exercise price) to its employees.
2. To receive ESOPs, you need to stay with the company for a certain period, usually between 1 to 4 years. After this time, some or all of your stock options become available to use. These are called vested options.
3. After vesting, you can choose to buy the shares at the price set by the company. It’s important to note that the difference between the market cost and the ESOP cost would be considered as income and be applicable to income tax.
   For example, if you buy the share at INR 100 while the market price of that share is INR 500, the gain (500 -100 = INR 400) will be considered as income.
4. You can sell the ESOPs anytime after the purchase, the gains from the sale will be applicable to capital gains tax in India.

Understand how ESOP taxation in India works and check the ESOP taxation rules that apply to your situation. A DBS Treasures NRI Savings Account can help you keep track of ESOP funds and support smooth repatriation.

Taxation of ESOPs for NRIs in India

As an NRI, you will be taxed for ESOPs at two stages as per the ESOP taxation rules:

Tax at the Time of Exercise (Purchase ESOPs)

When you buy shares at the company's offer price, the difference from the market price is treated as taxable income. The taxability of ESOP under the Income Tax Act requires the employer to deduct TDS (tax at source) on this amount.

 The taxation rate depends on the income tax slab in India for that financial year. For example, In India, INR 600 per share is taxable as income if the share's market price is INR 800 and your exercise price is INR 200.

Tax at the Time of Sale (When You Sell the Shares)

You need to pay capital gains tax in India when you sell ESOP shares. The rate depends on the holding period and the profit made.

Taxation of Foreign ESOP in India

The taxation of foreign ESOP in India involves more than just the exercise and sale of shares. You also need to consider your residential status and reporting obligations.

Tax Based on Residential Status

Your tax liability depends on whether you are a full resident or not:

• Resident and Ordinarily Resident (ROR): Entire ESOP income is taxable in India.
• Resident but Not Ordinarily Resident (RNOR) or Non-Resident: Only the portion of the ESOP income that relates to services performed in India is taxable. For example: If the ESOPs vested over four years and you worked in India for two, only 50% of the perquisite is taxable in India.

Reporting Foreign ESOPs in Your Tax Return

If you are a tax resident in India and hold foreign ESOP shares:

• You must report them under Schedule FA (Foreign Assets) in your income tax return (ITR).
• Disclosure is required even if you have not sold the shares.
• Failure to report foreign ESOPs can lead to penalties under the Black Money Act.

By addressing both the income and compliance aspects, you ensure complete reporting under the taxation of foreign ESOP in India.

Calculation of ESOP Tax for NRIs

Tax on ESOPs depends on the amount and the timing of your purchase and sale of shares. Here’s how it is calculated for NRIs:

• Perquisite Tax – The difference between market price and the pre-set price of ESOPs.
  • Formula: (Market Value on Exercise Date – Exercise Price) x Number of Shares
• Capital Gains Tax - When you subsequently sell the shares, you could be required to pay capital gains tax in India. It is based on the duration of time for which you held the shares and on the difference between your selling price and the Fair Market Value (FMV) at the time of exercise.
  • Formula: Capital Gains = Sale Price – Market Value at Exercise

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Double Taxation and DTAA Benefits for NRIs

As an NRI your earnings from ESOPs could be applicable to be taxed in the country where it was issued and the country where you reside. This is referred to as double taxation.

To avoid this issue, India has Double Taxation Avoidance Agreements (DTAAs) with many countries to ensure that you don’t pay income tax twice. As an NRI you must provide the following documents:

• Get a Tax Residency Certificate (TRC) for your resident country.
• File Form 10F and self-declaration with Indian tax authorities.
• Keep records of taxes paid in India for foreign tax credit, if need be.

Repatriation of ESOP Proceeds by NRIs

After you sell your shares under an employee share ownership plan, you might want to transfer the money abroad. This process is known as repatriation.

To repatriate ESOP proceeds:

• You can freely repatriate proceeds credited to an NRE account without any restrictions.
• There are no limits or approvals required for transferring these funds abroad.
• If using an NRO account, you may repatriate up to USD 1 million per financial year, subject to documentation and taxes

For compliance under ESOP taxation in India, keep the following ready:

• Proof of share sale
• Tax payment documents (e.g., challans, Form 15CA/CB)
• Broker and bank statements

This step ensures your ESOP proceeds are moved abroad within the rules of Indian exchange control and ESOP taxation.

Common Mistakes NRIs Should Avoid with ESOP Taxation

NRIs can face tax issues with ESOPs due to a few common oversights. Watch out for these:

• Not reporting in both countries: Failing to disclose ESOP income in India and your resident country can trigger double taxation or penalties.
• Delaying tax payments: ESOPs may be taxed at exercise and sale. Missing timelines may lead to interest charges.
• Assuming ESOPs aren’t taxable in India: Even foreign ESOPs can be taxed in India, depending on your employment period and where services were rendered.

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Conclusion

Handling ESOPs as an NRI involves tax planning, correct reporting, and smooth fund repatriation. To manage this better, consider a DBS Treasures Premium Savings Account. It helps you track ESOP proceeds, stay compliant with tax laws, and simplify overseas money transfers. For NRIs with employee share ownership plans, it offers clarity, control, and seamless financial support.

FAQs on ESOP Taxation for NRIs

1. How are ESOPs taxed in India for NRIs?

   NRIs are taxed at two stages—when exercising ESOPs (as perquisite) and when selling shares (as capital gains). The applicable rate depends on the holding period and type of capital gain.

2. Do NRIs have to pay tax twice on ESOPs?

   They may be taxed both in India and abroad. However, they can claim relief under the DTAA to avoid double taxation.

3. What is the tax rate on ESOPs for NRIs?

   Perquisite tax is based on the individual’s income slab. Capital gains tax is 10% (long-term) or 15% (short-term) plus surcharge and cess.

4. Is ESOP Taxable as Salary?

   Yes, at the time of exercise, the difference between market price and grant price is taxed as salary income in India.

5. How to Calculate ESOP Tax?

   Add the perquisite value at exercise to your salary income. On sale, compute capital gains as sale price minus fair market value on exercise.