Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed quarterly against CBDT notifications, RBI circulars and Income Tax Department guidance
Introduction
An engineer in Bengaluru exercises options in her employer’s Delaware parent. Nothing about that transaction is complicated commercially. Legally, it engages two regulators, creates two separate taxable events on two different dates, requires the Indian subsidiary to withhold tax on a share issue it played no part in, and creates an annual foreign asset disclosure obligation for the employee that survives long after she has left the company.
Most of it gets missed. The FEMA and tax rules that apply to ESOPs for employees in India involve two regulators, two taxable events, and at least three filings, and getting any one wrong shows up months later as a TDS default notice or an unreported foreign asset flag.
Two things make 2026 the year to get this right. The Income-tax Act, 2025 has renumbered the provisions and forms that ESOP administration runs on — every reference in your payroll system and employee communication is now out of date. And the foreign asset disclosure regime has hardened, with the Black Money Act carrying a fixed penalty per undisclosed asset that has nothing to do with the value of the asset.
This guide covers both sides: what the Indian subsidiary must do, and what the employee must do. They are different obligations, they run on different calendars, and neither party can discharge the other’s.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. ESOP administration sits between HR, payroll, tax and treasury, which is precisely why it falls through gaps — each function assumes another is handling it.
Where a rule is settled we state it and cite the source. Where published guidance conflicts — and on the interaction between cashless exercise and the Liberalised Remittance Scheme it does — we set out both positions rather than pick one.
Primary sources: the Income Tax Department for the Income-tax Act, 2025, rules, forms and Schedule FA; and the Reserve Bank of India for the Overseas Investment framework and reporting.
1. What changed on 1 April 2026
If your ESOP documentation, payroll configuration or employee FAQ was written before 2026, the references in it have moved.
| Item | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Employer withholding on salary | Section 192 | Section 392 |
| Salary certificate to employee | Form 16 | Form 130 |
| Quarterly salary TDS return | Form 24Q | Form 138 |
| Perquisite provision for ESOPs | Section 17(2)(vi) | Recodified under the 2025 Act, mechanics unchanged |
| Startup deferral window | 48 months | 60 months for shares allotted after 1 April 2026 |
| Period terminology | Financial Year / Assessment Year | Tax Year |
The perquisite is taxed under Section 17(2)(vi), now recodified under the 2025 Act, though the mechanics are unchanged.
The practical work is administrative rather than substantive. Payroll systems reference form numbers. Employee communications reference Form 16. Grant letters drafted by overseas counsel often cite Indian sections. All of that needs a pass.
The one substantive change is the extension of the startup deferral window from 48 to 60 months, which matters to a small number of employers — see section 5.
2. Two tracks, and which one you are on
FEMA treats these as entirely separate transactions, governed by different rules.
| Track 1 — Indian company grants to non-residents | Track 2 — Foreign parent grants to Indian residents | |
|---|---|---|
| Direction | Indian equity going out | Foreign equity coming in |
| Governing rules | Foreign Exchange Management (Non-debt Instruments) Rules, 2019, read with the Mode of Payment and Reporting Regulations, 2019 | Foreign Exchange Management (Overseas Investment) Rules, 2022, the OI Regulations, 2022, and RBI guidelines |
| Classification | Foreign investment into India | Overseas Portfolio Investment |
| Also engages | Section 62 of the Companies Act read with the Share Capital and Debentures Rules, and SEBI regulations for listed companies | Liberalised Remittance Scheme where cash is remitted |
This guide covers Track 2 — the foreign parent granting to employees of its Indian subsidiary, which is the situation for most foreign-owned Indian companies.
2.1 The OI Rules changed the framework in 2022
As of August 2022, these equity awards are treated as Overseas Portfolio Investments under the revised Overseas Investment Rules and Regulations, 2022, issued by the Ministry of Finance and regulated by the RBI. This replaces earlier treatment under the Liberalised Remittance Scheme.
The shift cleaned up reporting and gave Indian employees a clearer path to receive and sell foreign equity.
The practical effect is that acquiring foreign shares under an ESOP is now a recognised category of overseas investment with its own reporting, rather than an LRS remittance that happened to result in shares.
2.2 The condition most groups do not know about
The foreign parent must offer ESOPs to Indian employees on the same terms as those offered to employees in other jurisdictions.
This is a condition of the framework, not a fairness principle. A plan that carves out Indian employees for materially different treatment — different vesting, different exercise mechanics, different classes of share — needs to be examined against it before the first grant.
3. Taxable event one: exercise
Nothing happens at grant. Nothing happens at vesting. No FEMA compliance action is required when ESOPs are merely granted. A grant is a contractual right to purchase shares in future, not a current investment or remittance.
The first taxable event is exercise.
3.1 How the perquisite is computed
The difference between the fair market value of the shares on the exercise date and the exercise price is treated as a perquisite, taxed as salary income at the employee’s applicable slab rate, and the employer must deduct TDS.
Three components, and each carries a practical problem for foreign shares.
| Component | The issue for foreign shares |
|---|---|
| Fair market value on the exercise date | For a listed foreign company, the market price. For an unlisted one, a valuation is required — and it must be as at the exercise date, not the last funding round |
| Exercise price | Usually straightforward, but must be converted at the correct rate |
| Currency conversion | The perquisite is denominated in foreign currency and must be converted using the prescribed rule — using the parent’s internal rate is a common error |
3.2 The employer withholds, on income it did not pay
The employer is required to deduct TDS on the perquisite value at exercise under Section 192 of the Income Tax Act, 1961, now Section 392 of the Income-tax Act, 2025 from 1 April 2026.
The employer must deduct TDS on that perquisite in the same month.
This is the mechanic that surprises Indian finance teams, and it produces a specific practical problem: the employee has received shares, not cash, but the Indian company must remit tax in cash.
Our payroll team configures this before the first exercise window rather than after. The usual solutions are to recover the tax from that month’s salary, to require the employee to fund it, or to structure a sell-to-cover arrangement with the plan administrator. Each has consequences. Recovering from salary can leave a junior employee with very little net pay in the exercise month. Sell-to-cover requires the plan to permit it and the broker to support it.
Whichever route is used, it should be documented in the plan and communicated before employees exercise, not discovered on payday.
3.3 The perquisite flows into the salary certificate
The value of the ESOP benefit at exercise, being market price minus exercise price at the date of exercise, is taxable as a perquisite under the head Salary and must be reflected in the employee’s Form 16 by the employer.
Under the 2025 Act framework, that is Form 130, reported through Form 138. See TDS return filing.
4. Taxable event two: sale
When the employee sells the shares, capital gains are taxed. The gain is the difference between the sale price and the FMV on the date of exercise.
Note what that means: the FMV at exercise is taxed once as salary and then becomes the cost base for capital gains. There is no double taxation of the same amount — provided the exercise-date FMV was correctly established and recorded, which is why the valuation matters twice.
4.1 The holding period
Capital gains at sale are taxable in India — short-term if held under 24 months, long-term at 12.5% if held longer.
The 24-month threshold for unlisted and foreign shares is longer than the 12 months that applies to listed Indian equity, and employees frequently assume the shorter period applies. Short-term gains are taxed at slab rates, which for a senior employee is a materially worse outcome.
4.2 The holding period runs from exercise
Not from grant, and not from vesting. An employee who has held options for four years and exercises today starts a fresh 24-month clock on the shares.
This changes exercise timing decisions. An employee planning to sell shortly after exercise is choosing short-term treatment; one who can hold for two years after exercise is not.
5. The startup deferral, and why it probably does not apply to you
India provides deferral of the perquisite tax for employees of eligible startups.
Startup employees can defer perquisite tax on exercise for up to 60 months if the company holds an 80-IAC certificate from the Inter-Ministerial Board. That window was extended from 48 months to 60 months for shares allotted after 1 April 2026.
5.1 The eligibility reality
Only around 3,700 of more than 1.97 lakh DPIIT-recognised startups qualify, so most India employees pay the full perquisite tax upfront.
That ratio is worth internalising. DPIIT recognition is not the same as an 80-IAC certificate, and the second is granted by a separate Inter-Ministerial Board to a small fraction of recognised startups.
For a foreign-owned Indian subsidiary of an overseas parent, this relief is almost never available in any event — the certificate attaches to the Indian entity, and the perquisite arises on shares of the foreign parent.
Plan on the basis that the tax is payable at exercise.
6. When the foreign parent also withholds
A recurring situation with US parents in particular.
If the foreign parent withholds tax under its home country rules — US sell-to-cover, for example — the Indian employee can claim relief under the relevant Double Taxation Avoidance Agreement.
6.1 Why it happens
Plan administrators operate on the parent’s home-country rules by default. Where the plan includes a sell-to-cover mechanism calibrated to US withholding rates, it will apply that to an Indian employee unless configured otherwise — who then also has Indian TDS deducted by the Indian employer on the same perquisite.
The employee is left over-withheld across two jurisdictions and has to claim the foreign tax credit in India.
6.2 Claiming the credit
Foreign tax credit is claimed in the Indian return, supported by evidence of the foreign tax paid, under the framework in the income tax rules. Add tax slips and withholding certificates from overseas, Form 67 acknowledgments, and any correspondence with the AD bank to the employee’s file.
Form 67 is filed within the prescribed period, and missing it can jeopardise the credit.
6.3 The fix is at plan configuration
The better answer is to configure the plan so that home-country withholding does not apply to Indian participants, leaving the Indian employer to withhold correctly under Indian rules. That is a conversation with the plan administrator and the parent’s equity team, and it is much easier before the first exercise than after.
7. FEMA: what the employee does
7.1 Nothing at grant
No FEMA compliance action is required when ESOPs are merely granted.
7.2 At exercise, the LRS question
When you exercise an ESOP, you pay the exercise price to the foreign company and receive shares in return. If the exercise involves an actual cash remittance from India to pay the exercise price, that remittance counts as an LRS transaction and uses up your USD 250,000 limit proportionately.
There is no separate sub-limit on ESOP exercise remittances, but the amount still counts against the employee’s overall LRS limit, currently USD 250,000 a year. A senior employee exercising a large tranche can bump against it if also remitting for other purposes that year, such as a child’s education abroad.
That interaction matters and is rarely flagged to employees. An executive funding an overseas property purchase or education in the same financial year as a large exercise may find the exercise blocked by a limit they had already used.
7.3 The cashless exercise question, where sources disagree
Published guidance conflicts on whether a cashless exercise consumes LRS capacity.
One position: if the exercise price is met through a cashless exercise arrangement, where shares are simultaneously sold to cover the exercise cost and the employee receives only the net gain, no separate LRS remittance occurs.
The other: post the OI Rules 2022, the value of ESOP shares acquired — including cashless RSU allotments — counts toward the individual’s LRS utilisation for the financial year.
The two are not necessarily irreconcilable — one addresses whether a remittance occurs, the other whether the acquisition counts against the limit — but the practical answer for an employee planning a large exercise alongside other overseas remittances is materially different depending on which applies.
Confirm the position with the AD bank before an exercise that would consume a significant proportion of the limit. Do not rely on either reading without checking.
7.4 At sale, repatriation
Sale proceeds must be repatriated to India within the prescribed period. At sale, proceeds must generally be repatriated to India within 180 days.
Periods stated in published guidance vary, and the applicable period should be confirmed for the specific transaction. What is not in doubt is that proceeds cannot simply be left in an overseas brokerage account indefinitely.
This is one of the most commonly breached obligations, because the employee has no cash need in India, the broker does not prompt anything, and nobody at the Indian employer is monitoring it.
8. FEMA: what the Indian employer does
The Indian subsidiary has its own filing obligations, separate from the employee’s.
8.1 Form OPI
Employers must file Form OPI through their Authorised Dealer bank.
Under the Foreign Exchange Management (Overseas Investment) Rules, 2022, the acquisition is classified as Overseas Portfolio Investment, reportable to the RBI through Form OPI.
The trigger relates to cross-charge. If the ESOP cost is charged back to the Indian subsidiary, the Indian entity is required to file Form OPI on a semi-annual basis through its Authorised Dealer bank.
We have sat across the table from finance heads who assumed this was a one line disclosure. It is not.
8.2 The annual return
Under FEMA, the Indian subsidiary must file an annual return, Annexure B, to the RBI via the Authorised Dealer bank where ESOPs are issued by the foreign holding company to its employees.
8.3 Assign it to someone
Form OPI and the annual return sit with the RBI, not the tax authority or the MCA. That is precisely why they fall between advisors: the tax team is doing TDS, the company secretary is doing MCA filings, and nobody owns the FEMA reporting on a share plan operated by the parent.
Give it a named owner alongside the rest of your FEMA compliance and FDI reporting.
9. The cross-charge: where tax, transfer pricing and GST meet
Where the foreign parent recharges the cost of the ESOP benefit to the Indian subsidiary, three separate questions arise on the same entry.
| Question | What it turns on |
|---|---|
| Is the recharge deductible in India? | Whether it represents a genuine cost incurred for the Indian company’s employees, properly documented and supported |
| Is it an international transaction? | Yes — a recharge from an associated enterprise is within scope and reportable |
| Does GST apply? | GST considerations arise on cross-charging and the position needs specific assessment for the arrangement |
The transfer pricing point is often overlooked because the recharge does not look like a service fee or a royalty. It is nonetheless a transaction with an associated enterprise, and it belongs in the scoping exercise for the accountant’s report — see transfer pricing for Indian subsidiaries of foreign companies.
The GST question on cross-charges between related entities has been the subject of considerable debate and the position should be taken specifically rather than assumed.
10. Schedule FA: the disclosure that catches people years later
This is the employee’s obligation, and it is the one that produces the worst outcomes when missed.
Employees must report foreign holdings in their income-tax return in Schedule FA.
10.1 The calendar year trap
Schedule FA for AY 2026-27 examines applicable foreign assets and accounts held at any time during the calendar year ending 31 December 2025. This financial-year versus calendar-year difference is one of the most important practical issues.
Read that carefully. The Indian tax year runs April to March. Schedule FA looks at the calendar year. An employee reconciling their disclosure against their Indian financial year will report the wrong period.
The phrase “at any time during” matters equally. An employee who acquired shares in March and sold them in June still held a foreign asset during the calendar year and has a disclosure obligation, even though nothing appears on the year-end statement.
10.2 Which tables
The AY 2026-27 ITR-2 form asks for foreign accounts and investments held at any time during the calendar year ending 31 December 2025. Table A2 separately deals with foreign custodial accounts, while Table A3 deals with foreign equity and debt interests.
Most ESOP participants have both: a brokerage account with the plan administrator (A2) and the shares themselves (A3). Disclosing one and not the other is incomplete.
10.3 The salary perquisite is already elsewhere
The salary perquisite already appears in Form 16.
Schedule FA is a separate, additional disclosure of the asset. An employee who reasons that the ESOP has already been taxed and reported through payroll, and therefore needs no further disclosure, has misunderstood what Schedule FA is for.
10.4 The authorities already have the data
Information relating to foreign financial accounts may also be available to the Indian tax authorities under international information-exchange frameworks such as CRS and FATCA. Official guidance states that such information may include the account holder’s identity, account number, balance, dividends and financial proceeds.
This is the point that changes the risk calculation. Non-disclosure is not a question of whether the authority might find out. For an account with a broker in a participating jurisdiction, the information is being exchanged.
11. Black Money Act exposure
The penalty regime for undisclosed foreign assets is severe and does not scale with value.
The Black Money Act, 2015 imposes a fixed ₹10 lakh penalty per undisclosed foreign asset per assessment year — independent of the asset’s value.
Undisclosed foreign income and assets face a 57% effective charge, being 30% tax plus 90% penalty on the tax. Wilful evasion can lead to prosecution and imprisonment of 3 to 10 years.
11.1 Why “per asset per year” is the dangerous part
An employee with vested shares and a brokerage account who has not disclosed for four years is not facing one penalty. The exposure multiplies across assets and across years, and it bears no relationship to the value of the holding.
A junior employee with shares worth a few lakh rupees can face a penalty that dwarfs the asset.
11.2 The 2026 threshold
Official Budget 2026 guidance explains that specified penalty provisions under sections 42 and 43 and prosecution provisions under sections 49 and 50 of the Black Money Act apply subject to an aggregate threshold.
A de minimis threshold has been introduced for these provisions. Confirm the current threshold and exactly which provisions it applies to before relying on it, because it does not disapply the regime generally — it limits specified penalty and prosecution provisions.
11.3 FEMA penalties run separately
FEMA Section 13 penalties reach up to three times the amount involved in the contravention, plus ₹5,000 per day for continuing violations.
A failure that breaches both regimes attracts both. They are not alternatives.
12. Valuation: the number everything depends on
The exercise-date fair market value is used twice — once to compute the perquisite and once as the cost base for capital gains. Getting it wrong distorts both, in opposite directions, and the error surfaces years apart.
12.1 Listed parent
Where the foreign parent is listed, the market price on the exercise date supplies the number. The practical issues are which exchange, which price on the day, and how the currency is converted.
Set the convention once, document it in the plan or the payroll policy, and apply it consistently. An employer that uses closing price for some exercises and average price for others has an inconsistency that is visible on the face of its own records.
12.2 Unlisted parent
This is where most foreign-owned Indian subsidiaries sit, and it is materially harder.
An unlisted foreign company has no market price. A valuation is required as at the exercise date, and the common shortcut — using the price from the parent’s last funding round — is not the same thing. A round priced eighteen months ago on preference shares is not the fair market value of common stock today.
Three consequences of getting this wrong:
- Understated FMV understates the perquisite and the TDS, creating a short-deduction exposure for the Indian employer
- Overstated FMV overtaxes the employee at exercise and gives them a higher cost base, which they may never realise if the shares are eventually sold at less
- An undocumented FMV leaves both parties without a defensible position years later, when the valuation report nobody obtained is the only thing that would settle the question
12.3 Build it into the exercise process
The valuation has to exist before payroll can compute the perquisite, which means before the month-end TDS deposit. A plan that permits exercise on any business day and a valuation obtained annually do not fit together.
The workable arrangements are either fixed exercise windows with a valuation as at each window, or a rolling valuation methodology agreed in advance with a documented basis for interpolation. Either is defensible. Exercising first and valuing afterwards is not.
13. Plan design decisions that matter in India
Most ESOP plans are drafted by the parent’s counsel for the parent’s jurisdiction and rolled out globally. A handful of design choices change the Indian outcome substantially, and all of them are cheaper to address at plan level than employee by employee.
| Design choice | Why it matters in India |
|---|---|
| Whether cashless exercise is permitted | Determines whether employees need cash and whether an LRS remittance arises at all |
| Whether sell-to-cover is permitted | Provides the mechanism for funding Indian TDS without stripping the employee’s salary |
| Whether home-country withholding applies to Indian participants | Avoids double withholding and an FTC claim the employee has to run themselves |
| Exercise windows versus open exercise | Determines whether valuation can be obtained in time for the perquisite computation |
| Whether the cost is recharged to the Indian entity | Triggers Form OPI, transfer pricing scoping and a GST question |
| Whether Indian terms differ from other jurisdictions | Engages the same-terms condition under the FEMA framework |
| Post-termination exercise period | A departing employee may need to exercise, fund tax and remit within a short window |
| Whether RSUs or options are used | Changes the mechanics of exercise, funding and the point at which the perquisite arises |
13.1 The leaver problem
A short post-termination exercise period is standard in many plans and creates a specific difficulty in India. An employee leaving with vested options may have ninety days to exercise. In that window they must fund the exercise price, fund or have withheld the Indian perquisite tax, and complete any LRS remittance — while no longer on the payroll that would normally recover the tax.
Whether the former employer can, or should, withhold from a final settlement is a question worth answering before it arises rather than during an exit process.
13.2 RSUs behave differently
Restricted stock units are frequently rolled into the same India briefing as options, and the mechanics are not identical. With an RSU there is typically no exercise price to fund, so the LRS question presents differently, but the perquisite still arises and the Indian employer still has to withhold on it in cash.
Where a plan uses both instruments, the India communication should address them separately rather than treating them as interchangeable.
14. What each party actually has to do
| Stage | Indian employer | Employee |
|---|---|---|
| Grant | Record the grant; confirm plan terms comply with the same-terms condition | Nothing |
| Vesting | Track for future perquisite computation | Nothing |
| Exercise | Establish FMV; compute perquisite; convert currency correctly; deduct TDS in the same month; recover the cash | Fund the exercise; check LRS position; retain the exercise confirmation |
| Same period | Report in the quarterly salary TDS return; reflect in the salary certificate | — |
| Semi-annual | File Form OPI through the AD bank where the cost is cross-charged | — |
| Annual | File the annual return, Annexure B, via the AD bank | Disclose in Schedule FA on a calendar year basis |
| Sale | — | Compute capital gains; repatriate proceeds within the prescribed period; claim FTC where foreign tax was withheld |
| Ongoing | Transfer pricing scoping for the recharge; GST assessment | Schedule FA every year the asset is held |
Note the asymmetry in the last row. The employee’s disclosure obligation continues for as long as they hold the shares — including after they leave the company, when nobody is reminding them.
15. Three situations, worked through
Scenario A — The engineer who exercised and forgot
A software engineer at a US-owned Indian subsidiary exercised options in 2022, holds the shares in the plan administrator’s brokerage account, and has never sold. She has filed her Indian returns each year without Schedule FA, on the basis that the ESOP was already taxed through payroll and she has received no income from the shares.
The position. She has held a foreign custodial account and foreign equity in every calendar year since. Each is separately disclosable, in every year. Her account is in a jurisdiction participating in information exchange.
The exposure. Black Money Act penalty of ₹10 lakh per undisclosed foreign asset per assessment year, independent of value, subject to the threshold introduced in 2026. Across two assets and four years, that arithmetic is severe relative to a holding that may be worth less.
The fix. Take advice on disclosure and remediation before the next return, rather than after a notice. The Budget 2026 threshold may be relevant, and its application should be assessed on the specific facts.
Scenario B — The exercise that consumed the LRS limit
A senior executive plans to exercise a substantial tranche in December and remit the exercise price. In the same financial year, he has already remitted for his daughter’s university fees abroad.
The position. There is no separate sub-limit for ESOP exercise remittances, but the amount counts against the overall LRS limit of USD 250,000 a year. The education remittance has already consumed part of it.
The consequence. The exercise may not be fundable in that financial year, and the options may have an expiry date that does not wait for the next one.
The fix. Plan exercise timing against the employee’s overall LRS position, not just against the vesting schedule. For senior employees, this belongs in the annual compensation conversation.
Scenario C — The subsidiary that never filed Form OPI
A UK group recharges the ESOP cost to its Indian subsidiary. The Indian finance team books the recharge, the tax team deducts TDS on exercises, and the company secretary files the MCA returns. Nobody has filed Form OPI.
The position. Where the ESOP cost is charged back to the Indian subsidiary, the Indian entity must file Form OPI semi-annually through its AD bank, and an annual return in Annexure B.
Why it happened. The filing sits with the RBI. Each function assumed it belonged to another. The parent’s equity team, which administers the plan, has no visibility of Indian FEMA obligations at all.
The exposure. FEMA Section 13 penalties reach up to three times the amount involved, plus ₹5,000 per day for continuing violations.
The fix. Regularise through the AD bank and assign ownership — see FEMA compliance and FDI reporting. Separately, confirm the recharge has been scoped into the transfer pricing documentation.
16. Twelve mistakes
- Assuming the parent’s plan administrator handles Indian compliance. It does not, and it has no visibility of Indian obligations.
- Not deducting TDS in the month of exercise. The employer must deduct in the same month.
- Using the parent’s internal FX rate instead of the prescribed conversion rule.
- Valuing at the last funding round rather than at the exercise date, for an unlisted parent.
- Letting home-country withholding apply to Indian employees, creating double withholding and an FTC claim.
- Missing Form 67, jeopardising the foreign tax credit.
- Never filing Form OPI, because the filing sits with the RBI and belongs to no function by default.
- Omitting the ESOP recharge from transfer pricing scoping. It is an international transaction with an associated enterprise.
- Reconciling Schedule FA to the financial year when it runs on the calendar year.
- Disclosing the shares but not the brokerage account, or the reverse.
- Assuming the payroll perquisite discharges the Schedule FA obligation. They are separate.
- Leaving sale proceeds in the overseas account beyond the repatriation period.
17. Checklist
For the Indian employer
- Plan terms reviewed against the same-terms condition for Indian participants
- Valuation source and methodology agreed for exercise-date FMV
- Currency conversion rule configured correctly in payroll
- TDS deducted in the month of exercise, with a documented cash recovery mechanism
- Perquisite reflected in the quarterly salary TDS return and the salary certificate
- Form and section references updated for the 2025 Act across payroll, policy and employee communications
- Form OPI filed semi-annually through the AD bank where the cost is cross-charged
- Annual return, Annexure B, filed via the AD bank
- ESOP recharge included in transfer pricing scoping and the accountant’s report
- GST position on the cross-charge assessed specifically
- A named owner assigned for the FEMA filings
- Employee communication covering LRS, Schedule FA and repatriation issued before the first exercise window
For the employee
- Grant letters, vesting schedules and exercise confirmations retained
- Exercise-date FMV evidence retained — it is the cost base for capital gains
- LRS utilisation for the financial year checked before a large exercise
- Position on cashless exercise and LRS confirmed with the AD bank
- Brokerage statements retained for every year the account is held
- Schedule FA completed on a calendar year basis, covering both the custodial account and the equity
- Foreign withholding certificates retained and Form 67 filed where FTC is claimed
- Sale proceeds repatriated within the prescribed period
- Capital gains computed from the exercise-date FMV, with the correct holding period applied
- Disclosure continued in every year the shares are held, including after leaving the employer
Maintain a single folder with grant letters, vesting schedules, exercise confirmations, FMV and valuation evidence, demat and broker statements, and sale proceeds records.
Running an ESOP plan across India?
The plan is designed by the parent, administered by a broker who has never heard of Form OPI, and administered in India by a payroll team that inherited it. Send us your plan documents and your recharge arrangement and we will map the filings that apply, tell you which are being missed, and set out what your employees need to be told before the next exercise window.
18. Frequently asked questions
Q1. How are foreign ESOPs taxed for Indian employees?
At two points. At exercise, the difference between the fair market value on the exercise date and the exercise price is a perquisite taxed as salary at slab rates, with the Indian employer deducting TDS. At sale, the difference between the sale price and the exercise-date FMV is a capital gain. Nothing is taxed at grant or vesting.
Q2. Which section governs the employer’s withholding from 2026?
Section 392 of the Income-tax Act, 2025, which replaces Section 192 of the 1961 Act from 1 April 2026. Form 16 is now Form 130 and Form 24Q is now Form 138. The substance is unchanged; payroll systems, employee communications and grant letters referencing the old numbers need updating.
Q3. Does the Indian employer have to withhold on shares issued by the foreign parent?
Yes. The employer must deduct TDS on the perquisite value at exercise, in the same month, even though the shares are issued by the parent and the employer receives nothing. Because the employee receives shares rather than cash, the mechanism for recovering that tax — salary deduction, employee funding or sell-to-cover — should be documented in the plan and communicated before employees exercise.
Q4. What is the capital gains holding period for foreign shares?
Twenty-four months. Gains on shares held for more than 24 months from exercise are long-term and taxed at 12.5%; shorter holdings are short-term and taxed at slab rates. The clock runs from exercise, not from grant or vesting, so an employee planning to sell soon after exercising is choosing short-term treatment.
Q5. Can Indian employees defer the perquisite tax at exercise?
Only employees of eligible startups holding an 80-IAC certificate from the Inter-Ministerial Board, for up to 60 months for shares allotted after 1 April 2026, extended from 48 months. Only around 3,700 of more than 1.97 lakh DPIIT-recognised startups qualify. For a subsidiary of a foreign parent this relief is effectively unavailable.
Q6. How are foreign ESOPs treated under FEMA?
As Overseas Portfolio Investment under the Foreign Exchange Management (Overseas Investment) Rules, 2022, effective from August 2022. This replaced the earlier treatment under the Liberalised Remittance Scheme and gave the acquisition its own recognised category with its own reporting through Form OPI.
Q7. Does exercising an ESOP use up my LRS limit?
Where the exercise involves an actual cash remittance from India to pay the exercise price, that remittance counts against the overall LRS limit of USD 250,000 a financial year. There is no separate sub-limit for ESOPs, so a large exercise can collide with other remittances in the same year, such as overseas education fees.
Q8. Does a cashless exercise consume LRS capacity?
Published guidance conflicts. One position is that where shares are simultaneously sold to cover the exercise cost and the employee receives only the net gain, no separate LRS remittance occurs. The other is that post the OI Rules 2022, the value of ESOP shares acquired including cashless allotments counts toward LRS utilisation. Confirm with your AD bank before a large exercise.
Q9. What must the Indian subsidiary file with the RBI?
Form OPI through its Authorised Dealer bank on a semi-annual basis where the ESOP cost is charged back to the Indian subsidiary, and an annual return in Annexure B via the AD bank where the foreign holding company has issued ESOPs to its employees. These sit with the RBI rather than the tax authority or MCA, which is why they are often missed.
Q10. What is Schedule FA and who has to file it?
Schedule FA is the foreign asset disclosure in the Indian income tax return, and it is the employee’s obligation. ESOP participants typically have two disclosable items: the foreign custodial account with the plan administrator, reported in Table A2, and the foreign equity itself, reported in Table A3. Both must be disclosed, not one.
Q11. Why does Schedule FA use the calendar year?
Because the schedule examines foreign assets and accounts held at any time during the calendar year ending in the relevant period, not the Indian financial year. For AY 2026-27 that is the calendar year ending 31 December 2025. Employees who reconcile their disclosure to the April-to-March financial year report the wrong period.
Q12. The ESOP was already taxed in my salary. Do I still need Schedule FA?
Yes. The salary perquisite appearing in your salary certificate is a separate matter from the foreign asset disclosure. Schedule FA discloses that you hold a foreign asset, and the obligation continues every year you hold the shares, including after you leave the employer and even if the shares generate no income.
Q13. What is the penalty for not disclosing foreign ESOP shares?
Under the Black Money Act, 2015, a fixed penalty of ₹10 lakh per undisclosed foreign asset per assessment year, independent of the asset’s value, subject to a threshold introduced in 2026 for specified provisions. Undisclosed foreign income and assets face an effective charge of 57%, being 30% tax plus 90% penalty on the tax, with prosecution exposure of three to ten years for wilful evasion.
Q14. Will the tax authority actually know about my foreign shares?
Information on foreign financial accounts is available to Indian tax authorities under international exchange frameworks including CRS and FATCA, and can include the account holder’s identity, account number, balance, dividends and proceeds. For an account with a broker in a participating jurisdiction, non-disclosure is not a question of whether it will be identified.
Q15. Do sale proceeds have to be brought back to India?
Yes. Sale proceeds must be repatriated to India within the prescribed period, commonly stated as 180 days, and the applicable period should be confirmed for the specific transaction. Proceeds cannot be left in an overseas brokerage account indefinitely. This is frequently breached because the employee has no cash need in India and nothing prompts the transfer.
Q16. Our US parent already withheld tax. Am I taxed twice?
You should not be, but you may be over-withheld temporarily. Where the foreign parent withholds under its home country rules, the Indian employee claims relief under the applicable Double Taxation Avoidance Agreement, supported by the foreign withholding certificate and Form 67 filed within the prescribed period. The better fix is to configure the plan so home-country withholding does not apply to Indian participants.
Q17. Is the ESOP cost recharge a transfer pricing transaction?
Yes. A recharge from the foreign parent to the Indian subsidiary is a transaction with an associated enterprise and falls within the scope of transfer pricing, requiring inclusion in the accountant’s report and supporting documentation. It is commonly omitted from scoping because it does not resemble a service fee or royalty. GST considerations on the cross-charge arise separately.
Q18. What is the single most commonly missed obligation?
Form OPI, on the employer side, and Schedule FA on the employee side. Both are missed for the same reason: they sit outside the function that would normally notice. Form OPI is an RBI filing on a plan the parent administers; Schedule FA is a disclosure of an asset the employee has already been taxed on through payroll and therefore assumes is dealt with.