Disclosure of ESOPs from a Foreign Parent Company in an Indian Employee’s ITR

Disclosure of ESOPs from a Foreign Parent Company in an Indian Employee’s ITR

Employee Stock Option Plans (ESOPs) received from a foreign parent company by an Indian resident employee are treated as foreign assets and carry specific tax and disclosure obligations. They are taxed twice—first as a perquisite at exercise based on the fair market value, and later as capital gains at the time of sale, with Double Taxation Avoidance Agreement (DTAA) benefits available for foreign tax paid. The Indian employer typically deducts TDS on the perquisite value. Residents and Ordinarily Residents must report these ESOP shares every year in Schedule FA of their Income Tax Return, and disclose related income in Schedule FSI and foreign tax credits in Schedule TR, accompanied by Form 67. Such taxpayers must use ITR-2 or ITR-3. Non-disclosure can trigger severe consequences under the Black Money Act, including a ₹10 lakh penalty per year, possible prosecution, disallowance of foreign tax credits, and scrutiny through global information-sharing systems.

1. Taxation of Foreign ESOPs in India

The income arising from ESOPs is generally taxed in India at two separate stages:

Important Note: The Indian company is often obligated to deduct Tax Deducted at Source (TDS) on the perquisite value (Stage 1 income) and reflect it in the employee’s Form 16.

2. Mandatory Disclosure Requirements in ITR

For a Resident and Ordinarily Resident (ROR) individual, disclosure of all foreign assets is mandatory, even if no income was earned from them during the financial year.

• Schedule FA (Foreign Assets): This is the most crucial schedule. The holding of ESOP shares of a foreign company must be mandatorily disclosed here. This disclosure is required every year until the shares are sold or disposed of.
  • The details to be disclosed include the name of the foreign company, address, nature of the asset (e.g., share/securities), date of acquisition, cost of acquisition, and the peak balance/value during the year (converted into INR).
• Schedule FSI (Foreign Source Income): Any income earned from the ESOPs, such as the perquisite value and the capital gains on sale, must be reported here on a country-wise basis.
• Schedule TR (Tax Relief): If tax has been paid in the foreign country on the ESOP income, this schedule, along with Form 67 (filed online), must be used to claim Foreign Tax Credit (FTC) under the relevant DTAA, to avoid double taxation.

Appropriate ITR Form: Taxpayers holding foreign assets, including ESOP shares, generally cannot use the simpler ITR-1 or ITR-4 forms. They are typically required to file ITR-2 or ITR-3 (depending on whether they have business income).

3. Consequences of Non-Disclosure in ITR

Failure to accurately and fully disclose foreign assets, including foreign ESOPs, can lead to severe penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and the Income Tax Act, 1961.

• Penalty under Black Money Act: Non-disclosure of a foreign asset in the ITR can attract a flat penalty of ₹10,00,000 (Ten Lakh Rupees) per default (i.e., per year of non-disclosure).
• Prosecution: In extreme cases of willful non-disclosure or false reporting, prosecution may be initiated, which can lead to rigorous imprisonment for a term of up to 7 years.
• Disallowance of Foreign Tax Credit (FTC): Non-disclosure of the foreign income and asset can revoke the taxpayer’s right to claim relief under the DTAA (via Schedule TR and Form 67), resulting in full tax liability in India, leading to double taxation.
• Assessment and Notices: The Indian Income Tax Department receives information on foreign assets held by Indian residents through global agreements like the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA). A mismatch between the information received and the details reported in the ITR often leads to the issue of tax notices.

In summary, compliance is critical. The penalties for non-disclosure far outweigh the effort required to accurately report foreign ESOPs and other foreign assets in the ITR.