BackTaxation of ESOPs owned by you in foreign firms
People are required to disclose foreign holdings in their income tax returns
PremiumIf you are assigned shares in a foreign company, then you are the owner of the foreign assets. First of all, you are required to disclose such foreign holdings in your income tax return if your residential status is ‘resident of India’. ITR-2 or ITR-3 would be the correct ITR forms for the individuals holding foreign assets or earning income from foreign sources. The ITR form should be chosen based on the type of income earned during the year.
According to the income tax law, the salary received or accrued or arisen in India to a ‘resident’ is taxable in India. So, if you are a resident of India as per the Income Tax (IT) Act, you are subject to pay tax on the global income earned. So, capital gains from the transfer of shares of foreign companies are also taxed in India. This income may be taxed as short-term or long-term capital gains depending on the holding period.
Let’s take several scenarios and understand how ESOPs are taxed if in case you are:
a) Working outside India for a startup or a company that allotted you ESOPs but now you are back to India after shifting to another company here in India: If you hold the shares (received in the form of ESOPs) of the company that is located outside, tax liability will arise only when you sell those shares. Since these shares are not listed on a recognized stock exchange, the holding period criteria would be similar to an unlisted company, i.e, 24 months.
The holding period of shares shall be determined from the date of allotment or transfer of such shares. Hence, if the shares are sold after 24 months of allotment, they will be taxed as long-term capital gains. Otherwise, tax liability would be based on short-term capital gains.
The amount of capital gain shall be calculated as consideration received on the sale of shares minus the cost price of the shares.
The short-term capital gain would be taxable at normal tax slab rates applicable to you. However, long-term capital gains shall be taxed at 20% with indexation benefit on the cost price of shares.
b) Working remotely for a company based in some other country: If you are receiving income in India by working remotely for a company based in some other country, you are liable to pay tax in India.Tax should be paid in two instances, i.e. the year of exercise of the option and the year of sale of shares.
For the year in which the options are exercised, the difference between the fair market value (FMV) and the exercise price of the shares should be reported as perquisites under the head ‘income from salary’, and tax should be calculated as per normal tax slab rates applicable to you. When the same shares are sold, income should be taxed as short-term or long-term capital gains, depending on the holding period.
c) Working for a startup/company headquartered abroad and hold ESOPs in the parent company: Even though there is no direct employer-employee relationship with the parent company issuing the options, the difference between the FMV as on the date of exercise and the exercise price will be treated as a prerequisite. It is because the shares are allotted by virtue of employment.
Also, at the time of sale of such shares, you are liable to pay tax based on short-term or long-term capital gains, as mentioned above. In all the above cases, foreign countries may also tax such profits. So, the tax liability should be assessed as per the local tax laws of the place of residence of the foreign company issuing the shares and related tax treaties (such as double taxation avoidance treaties). Tax relief can be taken for the tax already paid in the foreign country as per the DTAA. Accordingly, Form 67 showing the details of the foreign income and tax paid on the same shall be furnished.
Archit Gupta is founder and chief executive officer, Clear.in.
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