Many global companies offer employee stock ownership plans (ESOPs) to reward and retain employees. These are treated as income and taxed accordingly. In India, the taxability of ESOPs depends on where the employee worked during the vesting period, as per OECD guidelines.
Recent rulings clarify that ESOPs are taxed based on where they are earned—not where the employee is located when the options are exercised. This means looking at where the employee provided services during the vesting period. For internationally mobile employees, managing ESOP taxes can be tricky, requiring detailed record-keeping of the employee’s work locations, tenure, and ESOP grants.
This article outlines how to handle ESOP income for employees working in both India and the US, particularly those classified as Resident and Ordinarily Resident (ROR) in India. It explains how to split ESOP income between the two countries and meet tax obligations in both jurisdictions.
ESOP income split and taxation
Income split between India and the US
- The ESOP income is divided based on the employee's tenure, vesting schedule, and the locations where they worked.
- Indian portion: The ESOP income tied to the time the employee worked in India will be taxed as part of their salary. This will be included in their Form 16 for Indian tax computation.
- US portion: The ESOP income linked to the employee’s tenure in the US must also be reported in India, as per the employee’s ROR status. It will be taxed in India but may qualify for tax credits to avoid double taxation.
Treatment of US ESOP income
Option 1 – Temporary inclusion in payroll
- The US portion of ESOP income can be temporarily included in Indian tax computations.
- Taxes are recovered through payroll to ensure provisional tax collection.
- Limitation: Since this is temporary, the income won’t appear in Form 24Q or Form 16 as final income for Indian tax purposes.
Option 2 – Self-assessment/advance tax payment
- Alternatively, the employee can pay taxes directly to Indian authorities through advance tax or self-assessment.
- The employee is responsible for ensuring timely payment and proper reporting in their income tax return (ITR).
Treatment of US ESOP vesting payments
- US ESOP vesting payments will be made directly to the employee.
- These payments won’t be part of Indian salary calculations but will still need to be declared in India, either as capital gains or under other applicable tax provisions.
Next steps and action items
- Final decision: The company will decide between temporary payroll inclusion and self-assessment based on employee preferences or regulatory considerations.
- Employee communication: Employees will be informed about the options and asked to choose their preferred method for handling US ESOP income.
- Payroll adjustments: If payroll inclusion is chosen, the payroll team will handle the tax adjustments. US-related income won’t appear in annual filings as India’s TDS system does not account for foreign income and taxes.
- Tax filing guidance: For self-assessment, employees will be reminded to declare US-related income in their ITR and ensure tax compliance.
- Documentation: All relevant details, tax implications, and chosen approaches will be documented and shared with employees.
Conclusion
Managing ESOP taxation for internationally mobile employees requires careful planning and communication. This article has outlined two approaches to handle the US portion of ESOP income in India: temporary inclusion in payroll or employee-led self-assessment. Employers should choose an approach that ensures compliance while considering employee convenience. Proper record-keeping and timely reporting are essential to meet tax obligations in both India and the US.