Taxation matters can be complex and more so, when they involve more than one country. If you are an Indian resident holding the ESOPs or employee stock ownership plans of an Indian company as part of your compensation package, the taxation of such ESOPS is clearly laid out under Indian tax laws. You get taxed at two stages – one, when you exercise your right under the ESOP to buy the shares and two, when you sell these shares. At the first stage, you get taxed on the perquisite value at your income tax slab rate. At the second stage, you get taxed on the capital gains.
The taxation of ESOPs, however, gets complex if you are an NRI (non-resident Indian). Do you, then, get taxed based on the taxation rules of India or of the other country?
“ESOP taxation depends on the rules of the country (India, in case of an India-based company) in which the ESOPs are granted/ exercised and the shares are sold, along with the country of residence of the taxpayer,” says Preeti Sharma, Partner, Global Employer Services, BDO India.
Elaborating further on her point, she says that if a person has resided in more than one country during the vesting period (period from grant date until the point in time you can start exercising the ESOP), the perquisite value (taxable value) of ESOPs at the time of exercise may be allocated proportionately to these countries. Additionally, what also matters is whether at the time of exercising the ESOPs, the person is a tax resident of India or the other country.
Note that, there can be situations where an individual becomes a tax resident of two countries (based on the conditions fulfilled as per the tax laws). In that case, a ‘tie-breaker test’ is applied to establish the individual’s primary place of residence – either India or the other country - for tax purposes.
Taxation when ESOPs are exercised
Let’s suppose Mr X is working at the India office of an Indian company. He has been given ESOPs. Later he is transferred to the overseas office of this company. Once the vesting period (partly spent in India, and partly in the other country) is over, Mr X exercises the ESOPs (buys his company’s shares). How will he be taxed?
According to Sharma, a part of the perquisite value that relates to the period of employment in India (India-sourced income) will be taxable in India and the rest (non-India-sourced/ global income) will be taxable in the other country. So, if half of the vesting period was spent in India, then 50 percent of the perquisite value will be offered for taxation in India. This is how Mr X will be taxed if he is not a tax resident of India at the time of exercise.
But, if Mr X happens to be a tax resident of India at the time of exercise, then the entire perquisite value will be offered for taxation in India. However, he can claim credit in India for taxes paid in the other country on the gains relating to the employment period in India.
Now, let’s take a slightly modified version of the above example. Suppose Ms Y has been working in the overseas office of an Indian company (right from the start) and she is granted ESOPs by the Indian parent company. Once the vesting period is over, she exercises the ESOPs. Then, how will she be taxed?
Source: Moneycontrol