Income Tax and FEMA Implications for Receiving Equity Stake in a UK Company as CTO

Equity received at  no cost in a foreign company needs to be disclosed in the Indian income tax return. The fair market value of the equity might be considered taxable as perquisite income. 

The equity might be taxed as perquisite income at the time of receipt or only when the shares are sold, depending on tax laws and regulations.. 

Yes, foreign assets like euity in a UK company need to be declared in Schedule FA of the Income Tax Return(ITR) if the asset value exceeds specified thresholds 

@ Ani L

Your foreign equity receipts have already hppened or yet to happen during this FY?

If it is the latter, then nothing to be reported in this AY Filing.

And for reporting in next year AY, best to wait for clarity next year, since the Direct Taxation laws keep on changing very often.

Receiving equity as a UK CTO has key tax implications. The value of the shares at grant is considered income, subject to Income Tax and National Insurance via PAYE. You may also have a future Capital Gains Tax liability when you sell. For FEMA (India), acquiring foreign assets requires compliance under the Liberalised Remittance Scheme (LRS) for the investment value and any subsequent reporting.

For precise guidance on navigating these rules, consult the experts at Kanakkupillai.

https://incorpadvisory.in/blog/a-complete-guide-to-foreign-esops-for-indian-employees/

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I use this free tool: https://mygstcalculator.com  
It's simple, accurate, and works with both Inclusive & Exclusive GST.

Very helpful! Many people are still unaware that BIS certificates can be verified online through the official BIS portal. This not only helps in checking the authenticity of a manufacturer’s claim but also protects buyers from fake ISI mark products. A quick online check ensures that the product is genuinely certified and safe to use. Thanks for simplifying the process—it’s a must-read for consumers and businesses alike!

Income Tax Implications (India)
1. Taxability of Free Equity (15% upfront)

Nature of Income: This is treated as a perquisite under Section 17(2)(vi) of the Income Tax Act, similar to ESOPs.
Valuation: The fair market value (FMV) of the shares on the date of allotment will be considered as taxable income.
Tax Point: Taxable in the year of allotment, even if no cash is received.
Disclosure: Must be reported under “Income from Salary” in ITR.

2. Taxability of Vesting Equity (10% over 3 years)

Each monthly vesting will be treated as a perquisite in the month it vests.
FMV on the vesting date will be taxable as salary income.

3. Schedule FA (Foreign Assets) Disclosure

Yes, you must disclose the shareholding under Schedule FA in the ITR.
Details required:

Name of the foreign company
Country of incorporation (UK)
Nature of asset (Equity)
Date of acquisition
Income earned (if any)
Value at year-end

4. Capital Gains Tax (on future sale)

When you sell the shares, capital gains will arise.
Cost of acquisition: FMV considered for perquisite taxation.
Holding period: Determines whether gains are short-term or long-term.
Foreign tax credit: If UK taxes apply, you can claim credit under DTAA.

FEMA Compliance (Foreign Exchange Management Act)
1. Receiving Shares Without Consideration

This is treated as a gift of foreign securities.
Under FEMA, Indian residents can receive foreign securities as a gift only with prior approval from RBI.

2. LRS (Liberalised Remittance Scheme)

LRS is not applicable here since no remittance is made by you.
However, RBI approval is required for acquiring shares without consideration.

3. Reporting Requirements

You must file Form FC-GPR or Form ODI depending on the nature of the investment (if it qualifies as ODI).
In this case, since you are not making an investment but receiving shares, Form ODI Part-I may be applicable if the holding is considered as Overseas Direct Investment (ODI).
Annual Performance Report (APR) may be required if ODI is triggered.

4. Future Funding by the UK Company

If the UK company raises funds, your compliance remains unchanged unless:

You are required to invest further
You might receive dividends or other income
Your shareholding changes significantly

Recommended Actions:

Under Income Tax:

Get a valuation report for FMV of shares on allotment and vesting dates.
Include perquisite income in ITR.
Disclose under Schedule FA.

Under FEMA:

Apply for RBI approval for receiving shares without consideration.
Consult a FEMA specialist to determine if ODI reporting is triggered.
Maintain records of shareholding and any income received.

Regular Compliances:

Track vesting and maintain documentation.
File APR if ODI applies.
Disclose any foreign income in future ITRs.