Is India’s ESOP taxation framework outdated for cross-border employees?

Employee Stock Option Plans (ESOPs) are increasingly facing scrutiny in India because existing tax rules are not well suited to today’s globally mobile workforce. Under current law, ESOPs are taxed as salary perquisites at the time of exercise, based on the difference between the fair market value of the shares and the exercise price. This framework works reasonably well when an employee’s services are rendered entirely in India during the grant-to-vesting period. However, it becomes problematic for expatriates and returning professionals who have worked across multiple countries during that time.

CA Niyati Shah, Vertical Head – Personal Tax at 1 Finance

In large multinational corporations, employee stock option plans (ESOPs) are usually rolled out as global compensation tools to recruit, reward and retain employees across regions. Such plans often cover staff working in different countries, including employees who relocate internationally. However, the tax treatment of ESOPs is far from uniform worldwide. While India levies tax on ESOPs as a perquisite at the stage of share allotment, jurisdictions such as Singapore tax employees at the point of grant, highlighting the sharp differences in cross-border ESOP taxation.

ESOPs are intended to reward long-term contribution, but India’s tax framework has not kept pace with today’s globally mobile workforce. In India, ESOPs are taxed in two stages:

First, when an employee exercises the option and receives shares, the difference between the market value of the shares and the price paid by the employee is taxed as salary income. This tax is payable even though no cash is received, and the employer must deduct tax at source.

Second, when the employee later sells the shares, any further appreciation is taxed separately as capital gains. This second stage is relatively straightforward and well understood.

The real challenge lies in the first stage of taxation. ESOPs are typically earned over several years, from grant to vesting. For employees who have worked partly in India and partly overseas during this period, such as expatriates or returning Indians, the law does not clearly explain how much of the ESOP benefit should be taxed in India. In practice, the entire benefit often gets taxed in India simply because the exercise happens here, even if part of the value was earned abroad.

This lack of clear allocation rules leads to uncertainty, disputes, and in some cases, double taxation. Many countries link ESOP taxation to where services were actually rendered. Introducing similar clarity through legislation or official guidance would make India’s ESOP regime fairer, more predictable, and better aligned with global employment realities.