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ESOP

An overview of taxation on India ESOPs for US based NRIs

by Holistic 1 Comment | Filed Under: Tax planning

Listen to this article


Employee Stock Option Plans (ESOPs) is a beneficial plan given to the employees of a company to buy the company shares at a pre-decided price and it forms part of taxable income. Most senior employees working with bluechip companies get ESOPs regularly and they have to pay tax on their ESOPs. When an Indian employee moves to the US to work there, he has to pay tax on his India ESOPs in US too, In this article we will explain how ESOPs are taxed in the US vis-s-vis India.

ESOPs can be taxed on two occasions:

    1. on exercising the option.
    2. on selling of exercised shares.

Taxation in India on exercising the option

The ESOP taxation in India would be easier to understand with a case study.

Example: Amit Verma is a 34 year old software engineer with one of India’s biggest software companies. Being a senior employee, he receives his ESOPs regularly in the form of company’s shares listed on the Indian stock exchange.

At the beginning of the next financial year, his ESOP of 50 shares got vested and he exercised the shares at a price of Rs 200 per share. The fair market value(EMV) at the exercise time was Rs 500 per share. Hence his perquisite value for ESOP taxation in India of one share stood at Rs 300, that is (FMV-Exercise price), Rs 15,000. As he was in the highest income bracket, he had to pay tax for exercising ESOP at the rate of 30%, that is, Rs 4,500.

The exercise tax on ESOP in India will be deducted from your salary through TDS by your employer itself.

Example of ESOP tax calculation with formula is given below for better understanding.

How to calculate ESOP tax in India on exercising

Taxable amount (or) Perquisite value = Number of Share × (FMV per share on exercised date – Exercised price per share)

    Taxable amount = 50 × (500 – 200) = 50 × 300
    = 15,000 Rs

    Tax = Taxable amount × Tax rate applicable to you
    Tax = 15,000 × 30%
    = 4,500 Rs

Taxation in India on selling the exercised shares

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When you sell your ESOPs the income generated is calculated as Capital Gains. In India, the difference between the sale value and the market value at the time of exercising the option determines the capital gain on ESOPs.

Example, if Amit sold his shares at Rs 700 per share, his capital gain per share would be Rs 100. The rationale behind this is that he has already paid the difference between the exercise value and market value, so now he must pay tax on excess only.

In India, long term capital gains (LTCG > 1 year) tax is NIL if a share is sold after one year of purchase, on the contrary short term capital gain (STCG < 1 year) tax is levied at 15% if the share is sold within a year.
Example of ESOP tax calculation with formula is given below for better understanding.

How to calculate Capital gains on ESOP tax in India on sale

Taxable amount = Number of shares × (Sale price per share on Date of sale – FMV per share on exercised date)

    Taxable amount = 50 × (700 – 500) = 50 × 200
    = 10,000 Rs

    Short Term Capital Gains Tax = Taxable amount × 15%
    = 10,000 × 15%
    = 1,500 Rs

Long Term Capital Gains Tax = NIL

Taxation in the US on exercising the option

It is mandated by the US IRS tax law that a person who is a citizen or resident of the US must pay taxes on his global income. As is the case with India, in the US too, the value of the ESOPs awarded is taxed right away when the employee exercises the ESOP option.

Example: If Amit moved to the company’s US office in 2019. Now being a US resident, he is bound to pay taxes on his global income in the US, which includes the perquisite value of his India ESOPs. As per the prescribed exchange rate by the IRS, the ESOP perquisite value of Rs 15,000 would be USD 211. Amit is entitled to claim a tax credit in his US tax return since he has paid tax in India on his income through ESOP exercise. Using form 1116 he can claim a tax credit of USD 63.36 in lieu of the 4,500 Rs tax which he paid in India (Conversion rate may vary).

But there are certain limitations on the amount of credit you can claim. For example, the India tax credit you claim should not exceed the tax payable in the US on your Indian income. You could seek a financial expert to sort it out for you.

Taxation in the US on selling the exercised shares

In the US, the same method is applied to calculate capital gains tax of ESOP as how it is done in India. The only difference is that there is no tax-exempt on long term capital gains in the US.

Example: In the case of Amit, as an NRI he is not entitled to pay taxes in India if he sells his ESOP shares after one year, but he has to pay taxes on those gains in the US. With reference to short term capital gains (< 1year) tax, he can claim a tax credit in his US tax return which is paid in India.

So as a US based NRI, when you exercise Indian ESOPs or sell Indian ESOPs, your taxation will not complete if you adhere to the Indian Taxation Rules. In addition to the Indian Taxation rules, you also need to comply with the US taxation rules.

The only good news is you will get a tax credit in US tax return for the LTCG taxes you paid in India with reference to these ESOPs.

To have a tax plan and investment plan completely in alignment with your financial goals, you should have a well thought out financial plan. If you are really interested in creating a personalised financial plan, then I would firmly suggest you test-drive our services by opting for .

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  1. Ganesh says

    August 31, 2018 at 1:37 am

    Thanks, it is very informative

    Reply

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Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

Google Reviews

Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

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