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A Comprehensive Guide to Taxation and Documentation for Employee Stock Options Abroad in India

Rashmi , Last updated: 22 August 2023  

Types of Employee Stock Options

  1. ESOP (Employee Stock Option Plan): You get shares in the company at a later date based on certain conditions, at a set price.
  2. RSU (Restricted Stock Unit): You receive shares on a future date when conditions are met, at no cost to you.
  3. ESPP (Employee Stock Purchase Plan): You receive shares at a future date under certain conditions, at a discounted price compared to the market.
  4. Phantom shares: These are not real shares but follow the price movement of actual shares.

Documents Needed for Taxation

  1. Broker Demat Account Statements: Shows stocks you exercised and sold, dividend income, taxes withheld, and stock balance.
  2. Employer's Stock Option Portal: Provides reports on vested stocks, their value, payments made, sales, and currency conversion.
  3. Form 12BA: Part of Form 16, showing exercised stock value minus what you paid, treated as a perk.
  4. Salary Slips: Show when stocks vested and the perk amount for that month.
A Comprehensive Guide to Taxation and Documentation for Employee Stock Options Abroad in India

Handling TDS by Employers

When RSUs vest, some stocks might be sold to cover taxes, and the rest are held. This helps manage tax deduction without affecting your salary.

Taxation of Perquisites in Form 16

For RSUs, the difference between market value on exercise date and allocation value is taxed. For ESPPs, the discount from market value is taxed at your slab rate.

Taxable Events and Rates

  1. Exercise: Taxed on the difference between exercise date market value and what you paid, at your slab rate.
  2. Sale: Taxed on the difference between sale price and exercise date market value. Long-term gain (held >24 months) taxed at 20%; short-term gain (held <24 months) taxed at slab rate.
  3. Dividend Receipt: Dividend income taxed at your slab rate.

Tax Withholding in Foreign Jurisdiction

Tax rules depend on the foreign country. For instance, US dividends may be taxed at 25% under India-US DTAA. Capital gains might not be taxed for non-resident aliens.

Exchange Rate Used

To convert foreign currency to Indian Rupee, SBI TTBR rate is used, usually the last day of the month before dividend or capital gain.

Foreign Jurisdiction's Calendar Year

Foreign assets need to be disclosed in your Indian tax return based on the foreign jurisdiction's calendar year, even if it's different from India's fiscal year.


Other Considerations

  1. Report brokerage account and employee stocks in Schedule Foreign Assets.
  2. You must repatriate sale proceeds within 90 days as per exchange laws.
  3. The employer handles tax at vesting, but you handle tax for dividends and capital gains through advance tax payment.

Remember, tax rules can be complex, so consulting a tax professional is recommended for accurate guidance.

The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global Services. She can also be reached at rrlglobal@yahoo.com

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