Cross-Border ESOPs in India: Unresolved Taxation Gap Silently Costing Mobile Professionals

Brief: Employee Stock Option Plans (ESOPs) have emerged as a major component of compensation for the Indian expatriates and professionals who are active in other countries, and have not been adjusted to the reality of cross-border earnings of ESOPs by the Indian tax law. The taxation system is fine as long as an employee has only worked in India during the vesting period, but it becomes a mess if he or she works in both countries during that period. Indian law does not have a statutory formula for allocating the ESOP benefit between jurisdictions. This makes the employer liable to pay the tax on the entire perquisite value irrespective of the place of services rendered, resulting in the employee getting the tax deduction twice. The OECD has, for a long time, recommended an apportionment formula based on a workday, which is already applied by countries such as the UK and Australia, but not India. While courts have been inclined towards service-based apportionment, there is no CBDT circular along the lines of this approach, and the situation has so far remained inconsistent and argumentative. This opportunity was not taken up by Budget 2026 and both employees and practitioners are left to deal with the void, which can easily be plugged with a well-drafted CBDT circular.

Introduction

ESOP stands for Employee Stock Option Plans, and it has become a currency of ambition in the modern corporate world. From a Delhi-based engineer at a global tech giant to an Indian executive managing operations across Asia Pacific, ESOPs are no longer restricted to just domestic benefits. They are globally recognized as an incentive tool that crosses the border with ease. But unfortunately, India’s tax laws have been lagging in coping with this reality.

Suppose there are two employees, one working entirely in India during the grant-to-vesting period of ESOPs, and the other one has worked cross-border, let’s say 2 years in the US and 2 years in India during a four-year vesting cycle. Now, for the former employee, the Indian tax law treatment is pretty clear. The perquisite is taxed at the time of exercise under Section 17(2)(vi) of the Income Tax Act, 1961 (now reflected in the Income Tax Act, 2025), and the employer deducts TDS accordingly. But in the case of the latter employee, Indian tax law offers no statutory formula for apportioning the ESOP benefit between jurisdictions. As a result, the perquisite often gets taxed in India, and the employee might simultaneously face tax in other jurisdictions as well.

The following article will examine the structural gap in the cross-border ESOP taxation laws in India and call for reforms to cope with the reality, reforms that Budget 2026 had the opportunity to deliver but largely deferred.

How ESOPs Are Currently Taxed in India — The Domestic Framework

A. The Two-Stage Taxable Event

Under the Income Tax framework, ESOPs are taxed at two different points:

1. At Exercise: When a company offers you its shares in future at today’s price, this locked-in price is called the exercise price, and when you actually use that option and buy the shares, that is called exercising. The difference between the present market value of the shares, i.e. Fair Market Value (FMV) on the exercise date and the exercise price paid by the employee is treated as a perquisite under ‘income from salary’. And the whole process is governed as per Section 17(2)(vi) of the Income Tax Act, 1961.

2. At Sale: When an employee sells his share, the profit that he earns is taxed as capital gains. The profit earned is the difference between the FMV and the price at which the shares were sold.

B. TDS Obligations

Just like your salary, when an employer provides you with certain perquisites such as ESOP, these perquisites also have to be taxed under Section 392 of the Income Tax Act, 2025, when you actually claim those shares. This tax deduction is known as TDS. This framework functions smoothly when the employee has worked entirely in India throughout the grant-to-vesting period. The difficulty arises the moment we introduce a cross-border dimension.

Where the Gap Opens: The Cross-Border Scenario

A. The Core Problem — No Apportionment Rule

Suppose Anjali is employed by an Indian subsidiary of a US-listed company and is granted 1000 stock options with a four-year vesting period at a strike price of $10. Now Anjali works for the first two years in India, and for the next two years, she is seconded to the US office, and again she returns to India, where she exercises the options when FMV is $50. The perquisite value here is 40,000 in total. Now the question that the Indian Tax law needs to answer is how much of the $40,000 should be taxed in India.

Logically, the profit was earned equally, working two years in India and two in the US. So, a proportionate approach would suggest that half of the total value should be taxed in each country, i.e. $20,000 in India and the remaining 50% in the US.

But the Income Tax Act provides no such exclusive provision for such calculations. Neither any apportionment formula nor any statutory guidance is mentioned under the Act. In practise, the full $40,000 will be treated as taxable in India by the employer just because the exercise occurred in India and she is a resident at the point.

B. Why Section 9(1)(ii) Does Not Fill the Gap

Section 9(1)(ii) of the Income Tax Act, 1961 says that the salary income is deemed to be accrued or arise in India if it is earned for services rendered in India. This provision clearly says that only that part of the salary is to be taxed that has been earned by working in India. Therefore, in the case of ESOP, only the portion of profit attributable to the services rendered in India should be taxed. This provision only provides the principal and not the mathematical method for the proportionate calculation, which allows the employers and the employees to construct their own apportionment methodology without any official sanction.

C. The Double Taxation Risk

Suppose in the case of cross-border service, an employee has to pay tax on the ESOP income in both jurisdictions, as many countries require the same. This can lead to a situation of double taxation. Though India has a Double Tax Avoidance Agreement with most of its treaty partners and includes a provision for relief on salary income, but they do not mandate any particular methodology for calculating the India-sourced portion of ESOP income.

The timing of taxing the ESOP income in different jurisdictions can vary, and this could lead to complexities, often making the employee suffer. Like in Singapore, the tax is calculated at the time of grant, whereas in India at exercise. This mismatching of taxable timings often becomes complex.

The OECD Framework India Should Adopt

According to the OECD commentary, for the applicability of Article 15 and Article 23A & 23B, a logical allocation method would be to consider that the employment benefit attributable to a stock-option has to be attributed to services performed in a particular country in proportion of the number of days during which employment has been exercised in that country to the total number of days during which the employment from which the stock-option is derived has been exercised. The International standard for cross-border ESOP taxation is based on this established formula.

Some of the other established jurisdictions, such as the UK, Singapore thou follow some variations to this approach but clearly provide a remedy to the employee in case of cross-border taxation. But India, even though it sends lakhs of professionals on cross-border service each year, lacks a clear framework like the other jurisdictions.

Practical Consequences for Employers and Employees

Suppose an Indian subsidiary is the employer, and it has to handle how to deduct TDS on ESOP benefits earned partly abroad. If I were the employer, I would have chosen to deduct TDS on the whole of the ESOP benefits earned, irrespective of cross-border services, because this is the safest and risk-free approach, as it would protect me from Section 201 liability (failure to deduct).

However, this approach may lead to over deduction for the employee, but it would be the employee’s problem to claim the relief through the ITR and Foreign Tax Credit mechanism. Now this is a genuine problem that the employees go through, and it makes the whole process really complex for them.

What CBDT Needs to Do

Many industry bodies, tax experts and even the Deloitte pre-budget submission highly expected the Budget 2026 to come up with specific ESOP apportionment guidance, but it miserably failed to do so. The CBDT could easily resolve the majority of these cross-border ESOP disputes by releasing a single notification or circular in line with the OECD workday apportionment framework. The CBDT specifically should:

• Issue a circular prescribing a standard method for apportioning ESOP benefits in cross-border services under Section 295 of the Income Tax Act 2025.
• To avoid double taxation, the cost of acquisition on capital gains should be clarified in the case of cross-border services.

These reforms don’t need any legislative amendment to the Act; only a well-drafted notification along the lines of the OECD framework would suffice.

Conclusion

Since ESOPS are a legitimate and increasingly common form of benefits for India’s globally mobile workforce, the current state of Indian law on the ESOP cross-border taxation lacks a clear framework for apportioning those perquisites, unlike other jurisdictions. The Income Tax Act 2025 was a great opportunity to resolve the issue, but the opportunity has been deferred, not seized. Now the CBDT should step in with a circular in line with the international framework and provide a mechanism for apportioning ESOP for cross-border services.

References

• Income Tax Act, 2025 (effective April 1, 2026) – Section 17 (Perquisites), Section 392 (TDS on Salary)
• Income Tax Act, 1961 – Section 17(2)(vi), Section 9(1)(ii), Section 192, Section 192(1C), Section 90, Section 91
• Income Tax Rules, 1962 – Rule 3(8), Rule 3(9) (FMV computation for listed and unlisted shares)
• OECD Model Tax Convention on Income and on Capital – Commentary on Articles 15 and 16, paragraphs 12.1-12.6 (Apportionment of employment income for stock options)
• Deloitte India – Pre-Budget Memorandum 2026: Recommendations on ESOP Apportionment Rules
• Business Today – ‘Budget 2026: ESOP taxation gaps trigger disputes for expatriates, returning Indians’ (January 17, 2026)
• Outlook Money – ‘Budget 2026: Why India Must Modernise ESOP Tax Rules for a Global Workforce’ (December 9, 2025)
• Foreign Exchange Management (Overseas Investment) Rules, 2022 – Employee Benefits Scheme provisions