I am an Indian resident. I've been granted stock options in an Israeli company worth around $400k right now. They vest this year. I was advised to exercise the option when a liquidity event happens. But as far as Long term capital gains are concerned, do I have to exercise the options now, and hold the stock for 2 years? Or wait 2 years with the options and when an exit scenario happens exercise them then. Is there any tax on exercising the foreign stock options from India?
Hello,
Since your are being offered ESOP's of an unlisted company, the period of holding for LTCG purpose should be more than 24 months starting from the exercise date (not the vesting date) till the date of sale.
Second, difference between the fair value of shares (as on exercise date) and exercise price is taxed seperately as a perquisite under salary head and TDS is deducted on the same.
Hope it clears your doubt here.
Feel free to reach out to me in case of further queries.
Regards
"Difference between the fair value of shares (as on exercise date) and exercise price is taxed seperately as a perquisite under salary head and TDS is deducted on the same. " How can TDS be deducted if the company isnt a legal entity in India?
Hello taxpayer,
To determine the deduction of tax on a person's income as per Indian income tax provisions, two things needs to be analysed.
1. Source of income
2. Residential status of person receiving income
In case, such income is being received from a person outside India, the provisions of DTAA between two countries, if exist, also needs to be considered.
It is nowhere written in the law that foreign companies are not required to deduct TDS only because they are not incorporated in India. If they are covered within the scope of these provisions, they must get themselves registered with IT department and start complying with the law.
In case your employer is not deducting the requisite tax, it should be computed and paid from your end to avoid interest or penal provisions getting triggered.
Remember that non deduction of tax is an altogether seperate non compliance at employer's end and it can never become your defence for not clearing tax dues.
Hope it answers your query.
Best Regards
Hi
When such option is exercised, the fair value of share less the exercise price will be taxed in India as a perquisite by your Indian employer. The Indian employer would deduct TDS.
After exercise of option, if you sell the shares, it would be short term capital gains. However if you hold for 2 years and then sell, it would be long term capital gains.
Dear Sir,
Hope you are doing well !!
For ESOP shares, the taxation happens at two stages: at the time of allotment of shares and on sale of shares. Under the typical stages of ESOP i.e. grant, vest and exercise, taxation triggers at the time of allotment of shares. The income is determined based on the difference of the fair market value (FMV) of shares on the date of allotment and the amount paid to acquire such shares. This income is treated as perquisite and taxed as part of salary income at the applicable slab rates.
The second tax trigger for ESOP shares would be at the time of sale of shares wherein the income would be the difference between the sale proceeds and the cost of acquisition of shares (i.e. FMV). The individual would need to pay tax on such capital gain.
It is advisable to take a phone consultation for detailed discussion.
Similar to Esops offered by an Indian company, the taxation of stock options by an MNC happens at two stages. First, when employees receive the stocks and then when they sell them.
The value of shares on the date of grant will be converted into INR and taxed. TDS will not be deducted but you will have to include it in your taxable income. When you sell them capital gain will be taxed.
- Shares are allotted/transferred on the date of exercise of the options. Exercise them now and hold them for more than two years (if possible) so that it can be treated as long term capital gain. Long term capital gain attracts concessional tax rate of 20%. If shares would be sold out before holding for more than two years then short term capital gain would arise and chargeable to tax at slab rates.
- In case of ESOPs, tax liability arises at two different points of time. One at the time of exercising of the option and second at the time of sale of the shares.
- At the time of exercising of the option, it would be taxable as perquisites under the head Income from Salary. Value of perquisites would be the difference between Fair market value of the shares and amount paid you for exercising the option. In case of unquoted shares, Fair market value shall be such value determined by a merchant banker on the specified date. Specified date should not being a date which is more than 180 days earlier than the date of exercise of the option.
- At the time of sale of such shares, capital gain would be taxable under the head Income from Capital Gain. Capital Gain would be taxable in the year of transfer of shares. Sale consideration would be FMV of such shares and cost of acquisition would be FMV of such shares on the date of exercise of the option.
- TDS/WHT would be deducted by the employer company on the perquisites for which you can claim foreign tax credit under double taxation agreement.
For more insights, you can visit website www.taxclique.com
For detailed discussion, we may discuss over a phone.
It is better to wait for 2 years and then pay only long term capital gain on same.
To read more on same you can click here: https://www.taxontips.com/tax-in-india-on-income-earned-from-rsu-vested-in-foreign-countries-and-exemption-from-such-income/
Hope you find the information helpful if you do please rate it 5 and provide your valuable feedback for my improvement. You can even book phone consultation for further personal assistance.
Thank you.
