How ESOPs of foreign firms are taxed in India

ESOPs allotted by foreign firms to Indian employees come under the category of foreign assets. Therefore, such employees will not be filling up the standard ITR-1 form, which is only available for Indian taxpayers with salary-based earnings from Indian companies without foreign assets.

Understanding How ESOPs of Foreign Firms Are Taxed in India

ESOP Taxation

Employee Stock Ownership Plan or ESOP is an employee benefit program offering workers a company ownership interest in the organisation. The company ownership available to the workers is in the form of shares.

The company or selling shareholder gets several tax benefits through ESOPs, and these benefits are also available to the participants. Thus, making ESOPs qualified employee benefit plans.

Companies use ESOPs as a business plan for aligning the interests of their workers with those of their stockholders. Companies use ESOPs for varied purposes, with the most common being providing a market for the shares of the departing owners of organisations.

Also read: What are the effects of having too many stocks in your portfolio?

Taxation Process of Foreign ESOPs in India

There are two steps followed in the taxation of foreign ESOPs in India. They are:

  • During share allocation
  • During share sale

The taxation of foreign ESOPs during the share allocation period depends on the difference in the stocks' sale price value and its FMV or fair market value on the day of allocation.

This is a step where the profits from ESOPs are considered a prerequisite. Thus, you can treat it as salary-based earnings. The exact taxation rate here will depend on slab rates, and the employers deduct TDS from the amount of the benefit as per their calculation.

This negatively influences the flow of cash due to the deduction of more taxes from employee salaries without any additional inflows. It is also important to note that taxations occur only on allocations of stock, not option allocations. Employees of a company receive shares only when they use an option and pay taxes.

For instance,

Mr A is entitled to get 10, 000 shares of X Company according to its stock option plan. Now, suppose, the company's shares are valued at Rs 200 per share in the market on the allocation date and the allocation price is 10, then Mr A's taxable share value will be Rs (200-10)*10, 000, i.e. 19, 00, 000. 

On the contrary, when taxation of foreign ESOPs is carried out during the sale of shares, the rate of taxation is calculated based on the difference between the cost at which the shares were sold and the FMV.

Also, read: What to do when your asset class turns expensive?

To Sum Up

Employees get foreign ESOPs when they work at Indian subsidiaries of large organisations based outside India. They prefer issuing ESOPs from parent companies even if they are not in India since those organisations typically feature higher share value. Nevertheless, since the employees receiving benefits are from India, the ESOPs allotted to them are taxed according to Indian Law.


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