Taxation of esop
This query is : Resolved
27 December 2013
Mr. A while in employment of an Indian subsidiary (XYZ Pvt. Ltd.)of foreign company (XYZ Inc, USA) received Stock Options of XYZ Inc. during 2004-05 with vesting period of 3 years.
Mr. A transferred to the parent company in USA
Mr. A exercised the option during FY 2010-11. He was non-resident during FY 2010-11, working in USA with parent company.
There was a gain on exercise of option of Rs. 1,00,000/- (difference between FMV and exercise price. There was no capital gain since it was a cashless transaction and stocks were transferred at the time of exercise only.
Ordinarily, had Mr. A been a resident in India and an employee of XYZ Pvt. Ltd. upto the FY 2010-11, the total amount would have been taxable as perquisite under salary.
Facts to be considered:
1. He was non-resident during FY 2010-11 (year of exercise)
2. During the vesting period of 3 year - he was in employment of Indian company for 2 years and US company for 1 year. (most important condition)
How would this transaction be taxable in India?
Mr. A transferred to the parent company in USA
Mr. A exercised the option during FY 2010-11. He was non-resident during FY 2010-11, working in USA with parent company.
There was a gain on exercise of option of Rs. 1,00,000/- (difference between FMV and exercise price. There was no capital gain since it was a cashless transaction and stocks were transferred at the time of exercise only.
Ordinarily, had Mr. A been a resident in India and an employee of XYZ Pvt. Ltd. upto the FY 2010-11, the total amount would have been taxable as perquisite under salary.
Facts to be considered:
1. He was non-resident during FY 2010-11 (year of exercise)
2. During the vesting period of 3 year - he was in employment of Indian company for 2 years and US company for 1 year. (most important condition)
How would this transaction be taxable in India?
30 December 2013
Please mention who entered into agreement with Mr A. Is it Indian company or US based foreign company?
30 December 2013
Indian Company had granted the ESOP
26 July 2025
Thanks for the clarification. Here's how the **taxability of ESOPs** would apply in **Mr. A’s case** under Indian income tax law:
---
### ✅ **Key Facts Recap:**
* Mr. A was **granted ESOPs in FY 2004-05** by **XYZ Pvt. Ltd.** (Indian subsidiary) — so **Indian company** granted the ESOPs.
* Vesting period = 3 years → i.e., ESOPs vested by **FY 2007-08**.
* During this vesting period:
* 2 years: Mr. A was employed in India (Resident)
* 1 year: Mr. A was in the US (Non-Resident)
* ESOPs were **exercised in FY 2010-11**, while Mr. A was **non-resident**, and there was **no capital gain** (cashless transaction).
* **Perquisite value (FMV – exercise price)** = ₹1,00,000.
---
## 🔍 **How Is This Taxable in India?**
### 1. **Taxability of ESOPs under Indian Law:**
Under **Section 17(2)(vi)** of the Income-tax Act, 1961, the **perquisite value of ESOPs is taxed as "Salary"** at the time of **exercise**.
But — **this applies only to the portion attributable to services rendered in India**, if the employee becomes **non-resident** later.
---
### 2. **Allocation of Taxable Income:**
Since the **ESOPs vested over 3 years**, and Mr. A was:
* **Resident in India for 2 years**, and
* **Non-resident for 1 year**,
We allocate the ₹1,00,000 perquisite proportionally:
| Service Period | Residency | Allocation | Taxable in India? |
| ----------------- | ------------------ | ---------- | --------------------- |
| Year 1 of Vesting | Resident (India) | ₹33,333 | Yes |
| Year 2 of Vesting | Resident (India) | ₹33,333 | Yes |
| Year 3 of Vesting | Non-Resident (USA) | ₹33,334 | No (foreign services) |
✅ **Total taxable in India = ₹66,666**
❌ **Not taxable in India = ₹33,334**
---
### 3. **Why is it taxable in India even if exercised later as Non-Resident?**
Because **the perquisite arises from employment services rendered in India**, even though the exercise happened later while Mr. A was a non-resident.
This is supported by:
* CBDT Circular No. 9/2014 dated 23 April 2014.
* Provisions under Section 5(2)(b) (scope of total income of non-residents).
---
## ✅ Final Summary:
| Particular | Amount (₹) |
| --------------------------------- | ----------------------- |
| Total Perquisite (FMV – Exercise) | 1,00,000 |
| Portion taxable in India (2/3) | **66,666** |
| Portion not taxable in India | 33,334 |
| Tax Head | **Salary Income** |
| Tax Year | FY 2010-11 (AY 2011-12) |
Mr. A should report ₹66,666 as **salary income in ITR for AY 2011-12**, and claim **relief under DTAA (if any)** for foreign taxes paid, if applicable.
---
If you want help with DTAA or Form 67 filing for relief under Section 90, I can assist.
---
### ✅ **Key Facts Recap:**
* Mr. A was **granted ESOPs in FY 2004-05** by **XYZ Pvt. Ltd.** (Indian subsidiary) — so **Indian company** granted the ESOPs.
* Vesting period = 3 years → i.e., ESOPs vested by **FY 2007-08**.
* During this vesting period:
* 2 years: Mr. A was employed in India (Resident)
* 1 year: Mr. A was in the US (Non-Resident)
* ESOPs were **exercised in FY 2010-11**, while Mr. A was **non-resident**, and there was **no capital gain** (cashless transaction).
* **Perquisite value (FMV – exercise price)** = ₹1,00,000.
---
## 🔍 **How Is This Taxable in India?**
### 1. **Taxability of ESOPs under Indian Law:**
Under **Section 17(2)(vi)** of the Income-tax Act, 1961, the **perquisite value of ESOPs is taxed as "Salary"** at the time of **exercise**.
But — **this applies only to the portion attributable to services rendered in India**, if the employee becomes **non-resident** later.
---
### 2. **Allocation of Taxable Income:**
Since the **ESOPs vested over 3 years**, and Mr. A was:
* **Resident in India for 2 years**, and
* **Non-resident for 1 year**,
We allocate the ₹1,00,000 perquisite proportionally:
| Service Period | Residency | Allocation | Taxable in India? |
| ----------------- | ------------------ | ---------- | --------------------- |
| Year 1 of Vesting | Resident (India) | ₹33,333 | Yes |
| Year 2 of Vesting | Resident (India) | ₹33,333 | Yes |
| Year 3 of Vesting | Non-Resident (USA) | ₹33,334 | No (foreign services) |
✅ **Total taxable in India = ₹66,666**
❌ **Not taxable in India = ₹33,334**
---
### 3. **Why is it taxable in India even if exercised later as Non-Resident?**
Because **the perquisite arises from employment services rendered in India**, even though the exercise happened later while Mr. A was a non-resident.
This is supported by:
* CBDT Circular No. 9/2014 dated 23 April 2014.
* Provisions under Section 5(2)(b) (scope of total income of non-residents).
---
## ✅ Final Summary:
| Particular | Amount (₹) |
| --------------------------------- | ----------------------- |
| Total Perquisite (FMV – Exercise) | 1,00,000 |
| Portion taxable in India (2/3) | **66,666** |
| Portion not taxable in India | 33,334 |
| Tax Head | **Salary Income** |
| Tax Year | FY 2010-11 (AY 2011-12) |
Mr. A should report ₹66,666 as **salary income in ITR for AY 2011-12**, and claim **relief under DTAA (if any)** for foreign taxes paid, if applicable.
---
If you want help with DTAA or Form 67 filing for relief under Section 90, I can assist.
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