Income Tax and FEMA Implications for Receiving Equity Stake in a UK Company as CTO
This query is : Resolved
30 August 2025
Dear Experts,
One of my clients has recently incorporated a company in the UK and has offered me a full-time role as CTO. As part of the arrangement, I will be receiving :
15% equity stake upfront at no cost
Additional 10% equity over the next 3 years (vesting monthly, i.e., ~1% every quarter)
The purpose of this structure is to retain me and leverage my expertise and name.
Currently, there is no investment required from my side. The plan is that once we build a prototype, the company will look to raise funds.
I have the following queries:
Income Tax:
How do I disclose this in my Indian income tax return since I am receiving equity in a foreign company at no cost?
Will this be taxed as perquisite income (similar to ESOP) or only when I sell the shares?
Is there any requirement to declare it under the Schedule FA (Foreign Assets) of the ITR?
FEMA Compliance:
What FEMA rules apply when an Indian resident is allotted shares in a UK private limited company without consideration?
Do I need to file any intimation with RBI under LRS or any other FEMA regulation?
Future Funding:
Once the company raises funds abroad, will there be any additional compliance for me in India as a shareholder?
I want to ensure 100% compliance with both Income Tax and FEMA regulations from the beginning. Request guidance from the community on the correct approach.
Thanks in advance for your valuable inputs.
One of my clients has recently incorporated a company in the UK and has offered me a full-time role as CTO. As part of the arrangement, I will be receiving :
15% equity stake upfront at no cost
Additional 10% equity over the next 3 years (vesting monthly, i.e., ~1% every quarter)
The purpose of this structure is to retain me and leverage my expertise and name.
Currently, there is no investment required from my side. The plan is that once we build a prototype, the company will look to raise funds.
I have the following queries:
Income Tax:
How do I disclose this in my Indian income tax return since I am receiving equity in a foreign company at no cost?
Will this be taxed as perquisite income (similar to ESOP) or only when I sell the shares?
Is there any requirement to declare it under the Schedule FA (Foreign Assets) of the ITR?
FEMA Compliance:
What FEMA rules apply when an Indian resident is allotted shares in a UK private limited company without consideration?
Do I need to file any intimation with RBI under LRS or any other FEMA regulation?
Future Funding:
Once the company raises funds abroad, will there be any additional compliance for me in India as a shareholder?
I want to ensure 100% compliance with both Income Tax and FEMA regulations from the beginning. Request guidance from the community on the correct approach.
Thanks in advance for your valuable inputs.
07 September 2025
Income Tax Disclosure and Taxation
Equity received for services (even at no cost) is generally taxable as a perquisite under Section 17(2) of the Income Tax Act, similar to ESOPs, at the time of allotment rather than sale. The value for taxation is the fair market value (FMV) of shares on the date of allotment.
Shares received through future vesting are taxed as perquisites as they vest, based on FMV when vested.
If the shares are later sold, capital gains tax applies — the cost of acquisition is the FMV previously taxed as perquisite, and the holding period matters for LTCG/STCG.
Schedule FA (Foreign Assets) in the Indian ITR requires disclosure of any foreign equity held, including the name, value, and other details of the overseas company shares, regardless of whether income arises from them.
Equity received for services (even at no cost) is generally taxable as a perquisite under Section 17(2) of the Income Tax Act, similar to ESOPs, at the time of allotment rather than sale. The value for taxation is the fair market value (FMV) of shares on the date of allotment.
Shares received through future vesting are taxed as perquisites as they vest, based on FMV when vested.
If the shares are later sold, capital gains tax applies — the cost of acquisition is the FMV previously taxed as perquisite, and the holding period matters for LTCG/STCG.
Schedule FA (Foreign Assets) in the Indian ITR requires disclosure of any foreign equity held, including the name, value, and other details of the overseas company shares, regardless of whether income arises from them.
07 September 2025
FEMA Compliance for Share Allotment
Under FEMA, an Indian resident can accept shares from a foreign company (including UK companies) under certain clauses: for employment or ESOP, provided the shares are allotted on a global basis and there is no remittance from India.
No instant reporting to RBI under LRS is needed since there is no outflow/remittance and shares are a part of a compensation/ESOP plan.
Annual Performance Report (APR) must be filed with the RBI for overseas direct investment (ODI), even if shares are received at no cost, disclosing details of foreign assets held.
When disposing of shares, the proceeds must be strictly repatriated to India within 90 days.
Under FEMA, an Indian resident can accept shares from a foreign company (including UK companies) under certain clauses: for employment or ESOP, provided the shares are allotted on a global basis and there is no remittance from India.
No instant reporting to RBI under LRS is needed since there is no outflow/remittance and shares are a part of a compensation/ESOP plan.
Annual Performance Report (APR) must be filed with the RBI for overseas direct investment (ODI), even if shares are received at no cost, disclosing details of foreign assets held.
When disposing of shares, the proceeds must be strictly repatriated to India within 90 days.
07 September 2025
If the UK company raises funds, there is generally no additional compliance unless further shares are allotted or Indian shareholder participates in fundraising (by investing). Only amendments to disclosures (ITR Schedule FA, RBI APR) may be needed as the capital structure changes.
Any future cash investment by Indian resident must comply with RBI’s ODI (Overseas Direct Investment) or LRS (Liberalized Remittance Scheme) guidelines, and needs appropriate pre-approval and reporting.
Disclose foreign shares under Schedule FA in the Indian Income Tax Return annually.
Pay income tax as perquisite on shares received, and capital gains on subsequent sale, if applicable.
File RBI APR for foreign equity held, and repatriate sale proceeds as per FEMA.
Document the terms of equity allotment and keep all supporting records, especially for future scrutiny.
Any future cash investment by Indian resident must comply with RBI’s ODI (Overseas Direct Investment) or LRS (Liberalized Remittance Scheme) guidelines, and needs appropriate pre-approval and reporting.
Disclose foreign shares under Schedule FA in the Indian Income Tax Return annually.
Pay income tax as perquisite on shares received, and capital gains on subsequent sale, if applicable.
File RBI APR for foreign equity held, and repatriate sale proceeds as per FEMA.
Document the terms of equity allotment and keep all supporting records, especially for future scrutiny.
21 September 2025
Good luck....
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