ESOP & RSU Taxation for NRIs — Complete Cross-Border Guide (FY 2025-26)

By CA Mayank Wadhera (CA | CS | CMA | IBBI Registered Valuer) Founder, MKW Advisors | Legal Suvidha | DigiComply

Last Updated: March 2026 | Applicable: FY 2025-26 (AY 2026-27)

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If you are an NRI holding Employee Stock Options (ESOPs) or Restricted Stock Units (RSUs) from an Indian employer -- or an Indian-origin professional who relocated abroad while vesting was still in progress -- your stock compensation sits at one of the most complex intersections in international tax law. Two countries may claim the right to tax the same income. The rules differ depending on when you exercised, when you sold, which country you live in, and which Double Taxation Avoidance Agreement applies.

This guide breaks down every dimension of that complexity: the two-stage taxation architecture, the cross-border apportionment formula, country-specific rules for US and UK NRIs, the DTAA credit mechanism, practical worked examples with FY 2025-26 numbers, and the mistakes that cost NRIs lakhs every year.

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Table of Contents

1. Understanding ESOPs and RSUs: A Quick Primer
2. The Two-Stage Taxation Framework
3. Stage 1: Perquisite Taxation Under Section 17(2)
4. Stage 2: Capital Gains on Sale of Shares
5. Cross-Border Apportionment Formula
6. Capital Gains Tax Rates for FY 2025-26
7. TDS Obligations on ESOPs and RSUs
8. US NRIs: IRS Treatment, Section 83(b), and AMT
9. UK NRIs: HMRC Treatment and Apportionment
10. Double Taxation Relief: The DTAA Credit Mechanism
11. Cashless Exercise vs Regular Exercise
12. Worked Example: 500 ESOPs End-to-End
13. Reporting Requirements in India and Country of Residence
14. Common Mistakes That Cost NRIs Lakhs
15. FAQs

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Understanding ESOPs and RSUs: A Quick Primer

Before diving into tax treatment, it is critical to distinguish between the two most common forms of equity compensation.

Employee Stock Option Plans (ESOPs) grant employees the right to purchase company shares at a pre-determined price (the exercise price or strike price) after a vesting period. The employee pays the exercise price to acquire shares. The economic benefit is the difference between the market value of the share and the exercise price at the time of exercise.

Restricted Stock Units (RSUs) are a promise to deliver shares (or their cash equivalent) upon vesting. There is no exercise price -- the employee receives shares outright once vesting conditions are met. The entire fair market value at vesting is the economic benefit.

For Indian tax purposes, both are treated as perquisites under Section 17(2) of the Income Tax Act, 1961. The taxable event for the perquisite arises at the point of exercise (for ESOPs) or vesting (for RSUs).

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The Two-Stage Taxation Framework

Indian tax law taxes stock compensation in two distinct stages. Understanding this architecture is non-negotiable for NRIs because each stage may be taxable in a different country under different rules.

Stage 1 -- Perquisite (Salary Income)

When an employee exercises ESOPs or when RSUs vest, the benefit received is classified as a perquisite under Section 17(2)(vi) of the Income Tax Act. It is taxed as salary income at applicable slab rates (or flat 30% surcharge and cess for most NRIs under the old regime).

Perquisite Value = Fair Market Value (FMV) on the date of exercise/vesting - Exercise Price paid

For RSUs, since the exercise price is zero, the entire FMV at vesting is the perquisite.

Stage 2 -- Capital Gains on Sale

When the employee subsequently sells the shares, capital gains tax applies. The cost of acquisition for capital gains purposes is the FMV on the date of exercise/vesting (the same value on which the perquisite was computed). This is a critical point -- the perquisite-stage FMV becomes your purchase price for capital gains computation.

Capital Gain = Sale Price - FMV on date of exercise/vesting

The holding period for determining short-term vs. long-term capital gains starts from the date of exercise/vesting, not the grant date or the vesting start date.

Key Insight for NRIs: Stage 1 (perquisite) is taxable under the head "Salaries" and is subject to apportionment between India and the country of residence based on the vesting period. Stage 2 (capital gains) is taxable based on the source rules of the relevant DTAA -- typically in the country of residence, but India retains the right to tax shares of Indian companies.

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Stage 1: Perquisite Taxation Under Section 17(2)

FMV Determination Rules

The method for determining Fair Market Value depends on whether the shares are listed or unlisted.

Listed Shares (Indian Stock Exchanges): FMV is the average of the opening price and closing price of the share on the date of exercise on the recognized stock exchange where the share is listed. If the share is listed on multiple exchanges, the exchange with the highest trading volume on that date is used. If there is no trading on the exercise date, the closing price on the immediately preceding trading day is taken.

Unlisted Shares: FMV is determined by a Category-I Merchant Banker on the exercise date using the Discounted Cash Flow (DCF) method or Net Asset Value (NAV) method, as prescribed under Rule 3(8) of the Income Tax Rules.

Shares Listed on Foreign Stock Exchanges (e.g., NASDAQ, NYSE, LSE): For shares of a foreign company listed on a foreign stock exchange, the FMV is the closing price on the date of exercise on the relevant foreign exchange, converted to INR at the SBI telegraphic transfer buying rate (TTBR) on that date.

Perquisite Computation Formula

Perquisite = (FMV per share on date of exercise - Exercise Price per share) x Number of shares exercised

This perquisite is added to the employee's salary income and taxed at applicable rates. For NRIs, this is typically at the flat rate of 30% (plus surcharge and cess) for income above Rs 15 lakh, or at slab rates if total income is lower.

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Stage 2: Capital Gains on Sale of Shares

Once the shares are acquired through exercise/vesting, any subsequent sale triggers capital gains tax. The classification between short-term and long-term depends on the holding period and whether the shares are listed or unlisted.

Holding Period Rules (FY 2025-26)

Cost of Acquisition for Capital Gains

This is where many NRIs and even tax professionals make errors. The cost of acquisition for computing capital gains is the FMV on the date of exercise/vesting -- the same value that was used to compute the perquisite.

Cost of Acquisition = FMV per share on the date of exercise/vesting

The exercise price paid by the employee is NOT the cost of acquisition for capital gains purposes. The logic: the difference between FMV and exercise price has already been taxed as a perquisite. Using FMV as the cost base ensures that the same income is not taxed twice.

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Cross-Border Apportionment Formula

This is the most powerful -- and most frequently missed -- provision for NRIs with ESOPs and RSUs. When an employee works in India for part of the vesting period and in another country for the remainder, the perquisite income must be apportioned between the two countries.

The Formula

Perquisite taxable in India = Total Perquisite x (Number of days of service in India during the vesting period / Total number of days in the vesting period)

Vesting Period = The period from the grant date to the vesting date (or exercise date, depending on the DTAA and jurisdiction).

Days of service in India = The number of days the employee was physically present in India and rendering services during the vesting period.

Example of Apportionment

An employee is granted 1,000 ESOPs on 1 April 2021, with a 4-year vesting period. The employee works in India until 30 September 2023 (2.5 years = 913 days) and then relocates to the US. The options vest and are exercised on 31 March 2025.

• Total vesting period: 1,461 days (4 years)
• Days in India during vesting period: 913 days
• Apportionment ratio: 913 / 1,461 = 62.49%

If the total perquisite is Rs 30,00,000, the amount taxable in India is:

Rs 30,00,000 x 62.49% = Rs 18,74,700

The remaining Rs 11,25,300 is taxable only in the country of residence (US in this case).

Critical Note: India can tax only the portion of the perquisite attributable to services rendered in India. This apportionment is supported by OECD commentary, most DTAAs, and has been upheld in multiple rulings. Yet a staggering number of NRIs pay tax on the full perquisite in India because neither they nor their employer's payroll team applied the apportionment.

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Capital Gains Tax Rates for FY 2025-26

Following the changes introduced by the Union Budget 2024 (applicable from 23 July 2024 onward, and continuing into FY 2025-26), the capital gains tax rates are as follows:

Listed Equity Shares (on Recognized Indian Stock Exchange, with STT Paid)

Unlisted Shares

Foreign Listed Shares (e.g., US stocks received via RSUs)

For shares of foreign companies (not listed on Indian exchanges), the benefit of Section 111A and 112A is not available. These are taxed as:

Important for NRIs holding RSUs of US-listed MNCs: If you hold RSUs of companies like Google, Microsoft, or Amazon -- these are shares of foreign companies. Even if the parent is listed on NASDAQ, the shares are NOT listed on an Indian recognized stock exchange. Sections 111A and 112A do not apply. The holding period for LTCG is 24 months, not 12 months. The cost base is FMV at vesting, converted at the exchange rate on that date.

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TDS Obligations on ESOPs and RSUs

Employer's TDS Responsibility (Section 192)

The employer is required to deduct TDS on the perquisite value at the time of exercise/vesting under Section 192 of the Income Tax Act. This is part of the employee's salary income, and TDS must be deducted at the applicable slab rate.

Practical challenges for NRIs:

1. Indian employer with ESOPs of Indian company: TDS is straightforward. The employer computes FMV, determines the perquisite, and deducts TDS from the employee's salary or bonus.

2. Indian employer with RSUs of foreign parent: The parent company (say, in the US) allots the shares, but the Indian subsidiary is treated as the employer for TDS purposes. The Indian entity must deduct TDS even though it did not issue the shares.

3. Former employer: If the employee has left the company (common for NRIs who relocate), the former employer is still required to deduct TDS at the time of exercise. Many employers fail to do this, leaving the NRI exposed.

4. Apportionment and TDS: Employers typically deduct TDS on the full perquisite value without applying cross-border apportionment. The NRI must then claim a refund while filing the return.

TDS on Capital Gains (Section 195)

When an NRI sells shares, the buyer or the broker is required to deduct TDS under Section 195. For listed shares sold through recognized stock exchanges, the stock exchange mechanism handles this. For off-market sales or unlisted shares, the buyer must deduct TDS at the applicable capital gains rate.

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US NRIs: IRS Treatment, Section 83(b), and AMT

For NRIs residing in the United States, ESOPs and RSUs create a parallel set of obligations under the Internal Revenue Code. Understanding both the Indian and US treatment is essential to avoid double taxation and optimize your overall tax position.

How the IRS Taxes Stock Compensation

RSUs: The IRS taxes RSUs as ordinary income at the time of vesting. The FMV on the vesting date is reported as compensation on Form W-2 (for employees). This is consistent with the Indian treatment -- both countries tax the same event (vesting) as employment income.

ESOPs (Non-Qualified Stock Options / NQSOs): For Non-Qualified Stock Options, the IRS taxes the spread (FMV minus exercise price) as ordinary income at the time of exercise. This is also reported on Form W-2.

Incentive Stock Options (ISOs): ISOs receive preferential treatment under US tax law. There is no regular income tax at the time of exercise. However, the spread at exercise is an adjustment for Alternative Minimum Tax (AMT) purposes. The gain is taxed as capital gains only when the shares are sold, provided the holding period requirements are met (at least 2 years from grant and 1 year from exercise).

Section 83(b) Election

The Section 83(b) election allows an employee to elect to be taxed on the FMV at the time of grant rather than at the time of vesting. This can be advantageous if the shares are expected to appreciate significantly during the vesting period.

How it works:

• The employee files an 83(b) election with the IRS within 30 days of the grant.
• The employee pays ordinary income tax on the FMV at grant (which may be minimal for early-stage startups).
• All future appreciation is taxed as capital gains (long-term if held more than 1 year from grant).

Relevance for NRIs:

• The 83(b) election is a US-specific provision. India does not recognize it.
• An NRI who files an 83(b) election in the US will still be taxed in India at the time of exercise/vesting on the perquisite computed under Section 17(2).
• This creates a timing mismatch that must be managed carefully through DTAA credits.

AMT Implications

For ISOs, the spread at exercise is added back to taxable income for AMT computation. If the AMT liability exceeds the regular tax liability, the employee pays AMT. This AMT paid can be carried forward as a credit against future regular tax liability.

NRIs with ISOs from Indian companies (rare but possible in certain structures) or US companies must track AMT exposure separately.

Form W-2 Reporting

The perquisite value of RSUs or NQSOs is included in Box 1 (Wages, tips, other compensation) of Form W-2. It is also reflected in Box 12 with Code V (for NQSOs). Federal and state income taxes are withheld at the applicable supplemental income withholding rate (currently 22% federal for amounts up to $1 million, 37% above $1 million).

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UK NRIs: HMRC Treatment and Apportionment

HMRC's Approach to Stock Compensation

HMRC taxes employment-related securities under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The key provisions are:

• Sections 471-484 (Restricted Securities): Applies to shares subject to restrictions. Tax is charged when the restriction is lifted.
• Section 476 (Election for Unrestricted Market Value): Similar to the US 83(b) election -- the employee can elect to be taxed on the unrestricted market value at acquisition.
• Sections 520-526 (Securities Options): Applies to stock options. Tax is charged on the exercise of the option on the gain (FMV minus exercise price).

UK Apportionment Rules

HMRC applies its own apportionment rules for internationally mobile employees. The apportionment is based on the proportion of the vesting period spent in the UK.

UK Taxable Amount = Total Gain x (UK Workdays during vesting period / Total workdays during vesting period)

Key difference from India: HMRC uses workdays rather than calendar days for apportionment. This can produce a different ratio than the Indian calculation, which typically uses calendar days.

National Insurance Contributions (NICs)

In addition to income tax, the exercise of share options may trigger employer and employee NICs. For securities options, Class 1 NICs apply on the option gain at rates up to 13.8% (employer) and 8% (employee) on earnings above the threshold.

UK-India DTAA

Under the India-UK DTAA, employment income (including ESOP perquisites) is generally taxable in the country where the employment is exercised. Article 16 governs this. The apportionment ensures that each country taxes only the portion attributable to services rendered within its territory.

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Double Taxation Relief: The DTAA Credit Mechanism

NRIs face the real risk of being taxed twice on the same ESOP/RSU income -- once in India and once in their country of residence. The DTAA credit mechanism is the primary relief available.

How the Credit Works

1. Identify the income: Determine which component (perquisite or capital gains) is being taxed in both countries.
2. Apply apportionment: Allocate the perquisite between India and the country of residence based on the vesting-period formula.
3. Pay tax in both countries on the respective apportioned amounts.
4. Claim credit: In the country of residence, claim a foreign tax credit for the tax paid in India on the India-apportioned income. Alternatively, in India, claim credit under Section 90 or 91 for tax paid abroad on the foreign-apportioned income.

Section 90 vs Section 91

Claiming DTAA Credit: Practical Steps

1. Obtain a Tax Residency Certificate (TRC) from your country of residence.
2. File Form 10F with the Indian tax authorities.
3. Report the foreign tax paid in Schedule FSI (Foreign Source Income) and Schedule TR (Tax Relief) of the Indian ITR.
4. In your country of residence, file for foreign tax credit (e.g., Form 1116 in the US, SA106 in the UK).

Common Pitfall: Timing Mismatch

India taxes the perquisite at the time of exercise. The US taxes it at the time of vesting (for RSUs) or exercise (for NQSOs). If exercise and vesting happen in different financial years across the two countries (due to different fiscal year calendars -- India: April-March; US/UK: January-December for individuals in the US, April-March for the UK), the credit may need to be claimed in a different tax year, complicating compliance.

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Cashless Exercise vs Regular Exercise

NRIs often face a practical problem: exercising ESOPs requires paying the exercise price upfront, and the shares received may be in a demat account with sale restrictions. The cashless exercise mechanism addresses this.

Regular Exercise

1. Employee pays the exercise price from personal funds.
2. Shares are allotted to the employee's demat account.
3. TDS is deducted on the perquisite value.
4. Employee holds shares and sells later, triggering capital gains.

Tax implications: Two distinct taxable events -- perquisite at exercise and capital gains at sale. The holding period for capital gains starts from the exercise date.

Cashless Exercise (Same-Day Sale)

1. Employee exercises options and simultaneously sells all or part of the shares in the market.
2. The sale proceeds are used to pay (a) the exercise price, (b) TDS on the perquisite, and (c) brokerage and charges.
3. The net amount is credited to the employee.

Tax implications: Both the perquisite tax and capital gains tax are triggered on the same day. Since shares are sold on the exercise date itself:

• Perquisite = FMV at exercise - Exercise Price (taxed as salary)
• Capital Gain = Sale Price - FMV at exercise (this is typically negligible or zero if sold at market price on the same day, but can be non-zero if the sale is executed at a different price due to intraday fluctuation)
• Holding period is zero, so any gain is short-term capital gain

Which is Better for NRIs?

NRI Consideration: Many NRIs prefer cashless exercise to avoid FEMA complications related to holding shares in Indian demat accounts, repatriation delays, and currency risk. However, they forgo the potential LTCG rate benefit (12.5% vs. 20% STCG or slab rates).

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Worked Example: 500 ESOPs End-to-End

Let us walk through a comprehensive example covering both stages of taxation and cross-border apportionment.

Facts

• Employee: Rajesh, an NRI residing in the US since 1 October 2022
• Employer: An Indian IT company listed on BSE/NSE
• ESOPs Granted: 500 options on 1 April 2021
• Exercise Price: Rs 200 per share
• Vesting Period: 4 years (vesting on 31 March 2025)
• FMV on Date of Exercise (1 April 2025): Rs 800 per share
• Date of Sale: 15 June 2026
• Sale Price: Rs 1,200 per share
• Days in India during vesting period: 1 April 2021 to 30 September 2022 = 549 days
• Total vesting period: 1 April 2021 to 31 March 2025 = 1,461 days

Stage 1: Perquisite Computation

Perquisite per share = FMV at exercise - Exercise price
                     = Rs 800 - Rs 200
                     = Rs 600

Total Perquisite = Rs 600 x 500 shares = Rs 3,00,000

Cross-Border Apportionment

India-apportioned perquisite = Rs 3,00,000 x (549 / 1,461)
                              = Rs 3,00,000 x 37.57%
                              = Rs 1,12,710

US-apportioned perquisite = Rs 3,00,000 - Rs 1,12,710
                           = Rs 1,87,290

Tax in India on perquisite: Rs 1,12,710 taxed as salary income. At 30% + 4% cess = 31.2%, tax = Rs 35,166 (approximately).

Tax in US on perquisite: Rs 1,87,290 (converted to USD at the prevailing rate) taxed as ordinary income on Form W-2 / Form 1040 at applicable US federal + state rates.

Rajesh claims a Foreign Tax Credit in the US for the Rs 35,166 tax paid to India (converted to USD), and vice versa as applicable.

Stage 2: Capital Gains Computation

Sale Price per share         = Rs 1,200
Cost of Acquisition          = FMV at exercise = Rs 800
Capital Gain per share       = Rs 1,200 - Rs 800 = Rs 400

Total Capital Gain = Rs 400 x 500 = Rs 2,00,000

Holding Period: 1 April 2025 to 15 June 2026 = approximately 14 months (more than 12 months).

Classification: Long-Term Capital Gain (listed shares on Indian exchange, held > 12 months).

Tax under Section 112A:

LTCG = Rs 2,00,000
Exemption under Section 112A = Rs 1,25,000
Taxable LTCG = Rs 75,000

Tax = Rs 75,000 x 12.5% = Rs 9,375
Cess @ 4% = Rs 375
Total tax on LTCG = Rs 9,750

Total Indian Tax Liability Summary

Had Rajesh not applied apportionment, he would have paid tax on the full Rs 3,00,000 perquisite in India = Rs 93,600 -- more than double the correct amount. The apportionment saved him Rs 58,434 in India alone.

What Rajesh Reports in the US

• Form 1040: The US-apportioned perquisite of Rs 1,87,290 as ordinary income, plus any LTCG if the US claims source taxation on shares of Indian companies.
• Form 1116: Foreign tax credit for Rs 35,166 (plus Rs 9,750 LTCG tax if the US taxes the same capital gain).
• FBAR / Form 8938: Report the Indian brokerage/demat account if the balance exceeds the applicable threshold ($10,000 for FBAR; $200,000/$300,000 for Form 8938 depending on filing status).

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Reporting Requirements in India and Country of Residence

India

United States

United Kingdom

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Common Mistakes That Cost NRIs Lakhs

Mistake 1: Not Claiming Cross-Border Apportionment

This is the single most expensive mistake. Employers deduct TDS on the full perquisite. NRIs file returns with the full perquisite as Indian income. The India-apportioned amount could be 30-60% of the total, but without claiming apportionment, the NRI pays tax on 100%.

Fix: Compute the apportionment ratio, report only the India-apportioned amount as Indian salary income, and claim a refund for excess TDS.

Mistake 2: Double-Counting Perquisite in Capital Gains Cost

Some NRIs (and their tax advisors) use the exercise price as the cost of acquisition for capital gains instead of the FMV at exercise. This results in the same income being taxed twice -- once as a perquisite and again as capital gains.

Fix: Always use FMV at the date of exercise/vesting as the cost of acquisition under Section 49(2AA).

Mistake 3: Applying Wrong Holding Period for Foreign Shares

NRIs holding RSUs of US-listed companies (e.g., Google, Meta) sometimes apply the 12-month holding period for LTCG (applicable to Indian-listed shares under Section 112A). For unlisted/foreign shares, the holding period for LTCG is 24 months.

Fix: Determine whether the shares are listed on a recognized Indian stock exchange. If not, apply the 24-month threshold.

Mistake 4: Not Filing Form 67 for Foreign Tax Credit

The Supreme Court and various tribunals have held that Form 67 is a procedural requirement, and some rulings have allowed credit even when Form 67 is filed late. However, the safest course is to file Form 67 before the due date of the return. Many NRIs miss this and lose the DTAA credit.

Fix: File Form 67 electronically on the income tax portal along with proof of foreign tax paid.

Mistake 5: Ignoring FBAR and FATCA Reporting in the US

US-based NRIs who hold Indian demat accounts with ESOP shares often fail to report these accounts on FBAR (FinCEN 114) and Form 8938. The penalties for non-filing are severe -- up to $10,000 per violation for FBAR, with willful violations carrying penalties up to $100,000 or 50% of the account balance.

Fix: Report all Indian financial accounts on FBAR if the aggregate balance exceeds $10,000 at any point during the year. File Form 8938 if the thresholds are exceeded.

Mistake 6: Not Converting Currency on the Correct Date

For capital gains computation on foreign shares, the sale price, cost of acquisition, and expenses must be converted to INR at the SBI TTBR on the respective transaction dates -- not at a single rate or an average rate.

Fix: Use the SBI telegraphic transfer buying rate on each relevant date (exercise date, sale date) for conversion.

Mistake 7: Treating RSU Vesting as a Non-Taxable Event

Some NRIs assume that tax is only due when they sell the shares. In reality, the vesting of RSUs itself is a taxable event (perquisite under Section 17(2)). Tax is due in the year of vesting, regardless of whether the shares are sold.

Fix: Report the perquisite in the year of vesting and pay advance tax or ensure TDS is deducted.

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FAQs

1. Are ESOPs taxable for NRIs in India even if the shares are of a foreign company?

Yes. If the ESOPs were granted in connection with employment in India (or the vesting period includes time spent working in India), the perquisite is taxable in India to the extent of the India-apportioned amount under Section 17(2). The fact that the shares are of a foreign company does not exempt the perquisite from Indian tax.

2. How is the perquisite value determined for RSUs of a US-listed company?

The FMV is the closing price of the share on the US stock exchange (e.g., NASDAQ or NYSE) on the date of vesting, converted to INR using the SBI telegraphic transfer buying rate on that date. If the vesting date is a non-trading day, the closing price on the immediately preceding trading day is used.

3. Can I claim both apportionment AND DTAA credit?

Yes, and you should. Apportionment determines how much of the perquisite is taxable in India vs. the other country. The DTAA credit ensures that the tax paid in one country is offset against the tax liability in the other country on the same income. These are complementary mechanisms, not alternatives.

4. What happens if my employer did not deduct TDS on ESOPs?

If the employer failed to deduct TDS, the obligation to pay tax shifts to you. You must pay advance tax or self-assessment tax on the perquisite. You may also face interest under Section 234B (for shortfall in advance tax) and Section 234C (for deferment of advance tax). The employer may face penalties under Section 201 for failure to deduct TDS.

5. I exercised ESOPs while I was a Resident Indian. I am now an NRI and want to sell. How is the capital gain taxed?

The perquisite was already taxed as salary income in the year of exercise. When you sell as an NRI, capital gains will be computed with FMV at exercise as the cost of acquisition. The gain will be taxed as STCG or LTCG depending on the holding period from the date of exercise. TDS will be deducted under Section 195 at the applicable rate.

6. Does the Section 112A exemption of Rs 1.25 lakh apply to NRIs?

Yes. The Rs 1,25,000 exemption on LTCG under Section 112A applies to all taxpayers, including NRIs, for listed equity shares sold through a recognized stock exchange with STT paid. This is a per-financial-year exemption.

7. Can I use the new tax regime (Section 115BAC) for ESOP perquisite taxation?

NRIs can opt for the new tax regime under Section 115BAC. Under the new regime for FY 2025-26, income up to Rs 12,00,000 is effectively tax-free (with the Rs 75,000 standard deduction taking the threshold to Rs 12,75,000 for salaried individuals). However, the new regime does not allow most deductions (80C, 80D, HRA, etc.). For NRIs with only ESOP income from India, the new regime may be beneficial if the income is below the higher slabs. Evaluate both regimes before choosing.

8. What is the tax treatment of ESOPs in a startup that is not yet listed?

For unlisted shares, the perquisite is computed using the FMV determined by a Category-I Merchant Banker. Section 80-IAC eligible startups can defer the perquisite tax for up to 5 years from the date of exercise (or until the shares are sold or the employee leaves the company, whichever is earlier) under the provisions applicable to eligible startups. However, this deferral benefit has specific conditions and may not always be available to NRIs if they have already left the company.

9. How do I handle ESOPs from an Indian company after I move back to India and become a Resident?

When you become a Resident and Ordinarily Resident (ROR), India taxes your worldwide income. If ESOPs vest after you return, the full perquisite is taxable in India. You can claim credit for any tax paid in the foreign country on the same income under the DTAA. The apportionment formula now works in reverse -- you claim credit in India for the foreign-apportioned amount taxed abroad.

10. Are there any FEMA implications for NRIs holding ESOPs of Indian companies?

Yes. NRIs can hold shares of Indian companies on a repatriation or non-repatriation basis. ESOPs exercised while the person was a resident are typically on a non-repatriation basis unless converted. Sale proceeds from shares held on a repatriation basis can be remitted abroad through an NRE account. Sale proceeds from non-repatriation shares go to the NRO account and are subject to the annual repatriation limit of USD 1 million under the LRS framework. Consult a FEMA advisor for the specific structure.

11. What is the penalty for not reporting foreign shares in the Indian tax return?

If you are a Resident Indian (returning NRI) and fail to disclose foreign assets (including foreign shares from RSUs) in Schedule FA of the ITR, penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 can apply. The penalty can be up to Rs 10 lakh for non-disclosure. For NRIs, Schedule FA is generally not applicable, but they must still report all Indian-source income correctly.

12. Can I exercise ESOPs partially across different financial years to optimize tax?

Yes, if the ESOP plan allows partial exercise, you can spread exercises across multiple financial years to keep each year's income within lower tax brackets or to maximize the use of the Rs 1,25,000 LTCG exemption under Section 112A in different years. This is a legitimate and effective tax planning strategy. Coordinate with your company's ESOP administrator to confirm partial exercise is permitted.

13. How does the India-US DTAA treat capital gains on shares of an Indian company sold by a US resident?

Under Article 13 of the India-US DTAA, capital gains from the sale of shares of an Indian company by a US resident can be taxed in both India and the US. India has the source-country right to tax. The US provides a foreign tax credit for Indian taxes paid. The effective rate is the higher of the two countries' rates on that income.

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Take the Complexity Out of Your ESOP/RSU Taxation

Cross-border ESOP and RSU taxation is not a DIY exercise. A single missed apportionment claim or incorrect cost base can result in overpayment of lakhs. The interplay between Indian tax law, US/UK tax rules, DTAA provisions, FEMA regulations, and reporting requirements across multiple jurisdictions demands specialized expertise.

CA Mayank Wadhera and the MKW Advisors team specialize in NRI tax advisory, cross-border equity compensation, and DTAA optimization. We have helped hundreds of NRIs across the US, UK, UAE, Singapore, and other jurisdictions structure their ESOP/RSU exercises, claim legitimate apportionment, secure DTAA credits, and stay compliant in every jurisdiction.

What We Offer

• End-to-end ESOP/RSU tax computation with cross-border apportionment
• DTAA credit optimization -- ensuring you never pay tax twice
• ITR filing for NRIs with Schedule FSI, Schedule TR, and Form 67
• US/UK coordination -- working with your CPA or chartered accountant abroad
• FEMA advisory for repatriation of ESOP sale proceeds
• Advance ruling and representation before Indian tax authorities

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Book a Consultation Today

Do not leave money on the table. If you are an NRI with ESOPs or RSUs, get a professional review of your tax position before you file. The apportionment claim alone can save you more than the cost of advisory.

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Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Tax laws are subject to change. Readers should consult a qualified tax professional for advice specific to their situation. The rates and thresholds mentioned are applicable for FY 2025-26 (AY 2026-27) as of the date of publication.

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