Clarity needed on ESOP tax for cross-border employees

EMPLOYEE STOCK OPTION Plans (ESOPs) have become an integral component of compensation structures, especially in startups, technology companies, and multinational organisations.

- NEERAJ AGARWALA

By allowing employees to acquire shares at a predetermined price, ESOPs aim to align employee performance with long-term company growth. However, while ESOPs offer wealth-creation opportunities, their taxation under the Income-tax Act, 1961 remains complex.

The challenges are more for expatriates and returning Indians, for whom the absence of clear legislative guidance results in uncertainty, double taxation and prolonged disputes.

Two different stages

ESOPs are taxed at two different stages. The first taxable event occurs at the time of exercise of the stock option. The difference between the fair market value of the shares on the exercise date and the price paid by the employee is treated as a perquisite under the head 'Income from Salary'.