Are you an employee of a multinational company in India? If so, you may have received ESOPs or stocks in your company as a part of your compensation. But did you know that these ESOPs can make you a “foreign asset holder”?
What does this mean? Well, it means that if you fail to report these stocks in your ITR, you could find yourself in trouble with India’s black money law. Even though your employer deducts taxes (TDS) and pays the tax due on these stocks, it doesn’t exempt you from reporting them in your ITR. Many people are not aware of this, and as a result, they end up receiving notices from the tax department.
The holdings you have as Employees’ Stock Option Plans (ESOPs), and Restricted Stock Units (RSUs), received from these MNCs located out of India are considered foreign assets and they are reported in the same way as those from foreign companies. Hence, such shares received as ESOPs need to be disclosed under Schedule FA while filing ITR.
You can further read about how to report Schedule FA while filing an ITR.
You are required to pay taxes when you exercise the ESOPs (when you actually buy the shares) and when you sell them.
So, when you exercise your ESOPs, the difference between the exercise price (the discounted price at which you get the shares) and the fair market value (the current market price) of the shares is considered perquisites and is reported under salary income head and taxed at the applicable slab rates. Your employer in India deducts the tax at source, and it is reflected in your Form 16.
At the time of sale of ESOPs, it will be considered as Capital Gains. The purchase cost in this case will be taken as the amount of perquisite and the nominal amount paid to exercise the ESOPs. The period of holding will depend on whether the shares are listed or not. To better understand the type of gains, let’s refer to the table below:
For instance, you got 100 ESOPs from your company. You paid ₹50 per share to exercise the right of ESOPs. The fair value of ESOPs is ₹130.
Here, the difference between the exercise price and fair value i.e. ₹8,000 [(130-50)*100] will be taxed as perquisite and TDS will be deducted by the employer in the year you exercise the options.
Now let’s say you sold the ESOPs for ₹185 per share, after holding the shares for 3 years. In this case, the difference of ₹5,500[(185-130)*100] will be taxed as LTCG.
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