(Authored by Ishmeet Kaur Saluja)

In recent years, we have seen foreign holding companies often use employee equity awards to incentivise employees of their Indian subsidiaries, driven by the need to align compensation with global equity practices, attract and retain high-quality talent in India’s competitive technology and financial services sectors, and integrate Indian teams into the parent company’s long-term incentive framework. The grant of such ESOPs is subject to the foreign exchange framework under the Foreign Exchange Management Act, 1999 (“FEMA”) andthe OI Framework (defined below), with corresponding tax implications under the Income-tax Act, 2025 (“ITA 2025”) at the time of exercise and subsequent sale. This article sets out the applicable FEMA framework, certain income tax treatment of perquisites and capital gains, and the key compliance obligations that may arise for the Indian subsidiary, the foreign parent and the employee, depending on the structure of the arrangement.

FEMA and Overseas Investment Framework

The issuance of ESOPs by a foreign company to resident employees in India constitutes the issue of foreign securities and is accordingly treated as a capital account transaction under FEMA. Such grants are regulated under the Foreign Exchange Management (Overseas Investment) Rules, 2022 (“OI Rules”), the Overseas Investment Regulations, 2022 (“OI Regulations”) and the Overseas Investment Directions, 2022 (“OI Directions”) (collectively the“OI Framework”). The acquisition of shares or interests in a foreign entity by an Indian resident pursuant to an ESOP or employee benefit scheme (“EBS”)is specifically recognised under Schedule III to the OI Rules. A resident employee or director of an office in India or branch of an overseas entity or an Indian subsidiary of an overseas entity may acquire shares or interests under an ESOP or EBS offered by the overseas entity, without limit, subject to the conditions prescribed under the OI Rules.

One such condition is that the ESOP or EBS must be offered by the issuing overseas entity globally on a uniform basis. However, the OI Rules do not further prescribe the parameters for determining whether a scheme is offered on a“uniform basis”. The global plan and any India-specific or other jurisdiction-specific variations should therefore be reviewed against this condition.

Under direction 22 of the OI Directions, although there is no limit on the amount of remittance made towards such acquisition, such remittances are required to be reckoned towards the LRS limit of the person concerned.

The classification of the resulting investment is also relevant. Acquisition of less than 10% of the equity capital of a foreign entity, whether listed or unlisted, without control, pursuant to an ESOP, EBS or sweat equity arrangement is classified as overseas portfolio investment.

The Reserve Bank of India’s (“RBI”) OI Regulations prescribe reporting through Form OPI for relevant portfolio investments, including investments pursuant to ESOP and employee benefit schemes. The prescribed reporting is required to be undertaken by the Indian subsidiary through the authorised dealer bank within 60 days from the end of the relevant half-year ending September or March.

Upon sale of the shares, where the employee’s holding is below 10% of the equity capital of the foreign entity and does not confer control, the sale proceeds are required to be repatriated to India and surrendered to an authorised person within 180 days from the date of receipt or realisation, in accordance with Regulation 7 of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2015, subject to any permitted retention or reinvestment under FEMA. Investments classified as overseas direct investment (“ODI”) are subject to the separate realisation and repatriation requirements under Regulation 9(4)of the OI Regulations, including the applicable 90-day timeline.

Income-tax Treatment of ESOPs

Under section 17(1)(d) of the Income Tax Act, 2025, the benefit arising from the exercise of ESOPs is taxable as a perquisite under the head Income from salaries. The taxable event occurs at the time of exercise, being the date on which the employee acquires the shares, and not at grant or vesting. The perquisite value is the difference between the fair market value of the shares on the exercise date and the exercise price paid by the employee.

For shares of a foreign company listed on a “recognised stock exchange”, the fair market value is the average of the opening price and closing price of the share on that date on the recognised stock exchange. Where the shares are not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a Category I merchant banker registered with SEBI on the specified date. For this purpose, the specified date may be the date of exercise or a date not more than 180 days before the date of exercise. The perquisite is added to the employee’s salary income and taxed at the applicable slab rates, and the Indian subsidiary as employer is obligated to deduct tax at source under section 392.

On subsequent sale of the shares, any appreciation arising after exercise is generally subject to capital gains tax. The FMV taken into account for determining the ESOP perquisite generally constitutes the cost of acquisition for computing the subsequent capital gain.

Shares of a foreign company that are not listed on a recognised stock exchange in India are subject to a 24-month holding period for determining whether they constitute a long-term capital asset. The holding period is reckoned from the date of allotment or transfer of the shares. Where the shares are held for more than 24 months, the resulting gain is treated as long-term capital gain. Under the current regime, long-term capital gains are taxable at 12.5% without indexation, plus applicable surcharge and cess.

Please note that the income-tax discussion above addresses tax year 2026–27 onwards under the Income-tax Act, 2025 and the Income-tax Rules, 2026. Earlier periods remain subject to the Income-tax Act, 1961 and the applicable transition provisions.

Foreign Asset Disclosure

Employees who are “resident and ordinary resident” in India for tax purposes may have disclosure obligations in respect of their foreign securities. Foreign equity interests are required to be disclosed in Schedule FA where the Schedule FA requirements apply to the taxpayer. However, Schedule FA need not be completed if the taxpayer is classified as “not ordinarily resident” or a “non-resident”. Foreign income and any foreign tax credit may require additional reporting.

Accounting and Corporate Law Considerations

In practice, the Indian subsidiary generally reimburses the foreign holding company for the securities or shares on a cost-to-cost basis, equivalent to the market value of the securities, without any additional fee, markup or commission.

For an Indian subsidiary that prepares its financial statements under Ind AS, accounting treatment for group share-based payment arrangements must be assessed under IndAS 102, which specifically addresses share-based payment arrangements involving group entities.

The SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 would not apply merely because the recipients are employees of an Indian subsidiary,where the awards relate to securities of a foreign parent outside the scope of the Indian listed-entity framework.

GST Treatment of Cross-Border ESOPs

The Central Board of Indirect Taxes and Customs issued Circular No 213/07/2024 GST dated 26 June 2024 to clarify the goods and services tax implications of ESOP, ESPP and RSU arrangements where a foreign holding company allots securities to employees of its Indian subsidiary. The circular confirms that the issuance and transfer of shares or securities under such schemes does not constitute a supply of goods or a supply of services within the meaning of the Central Goods and Services Tax Act, 2017, because securities are expressly excluded from the definitions of both goods and services.

ESOP, ESPP and RSU form part of the employee’s remuneration under the terms of employment, and in terms of Entry 1 of Schedule III to the Central Goods and Services Tax Act, 2017, services rendered by an employee to an employer in the course of or in relation to employment are treated as neither a supply of goods nor a supply of services, so that no goods and services tax is leviable on the compensation paid to employees by way of transfer of securities.

Where the Indian subsidiary reimburses the foreign holding company for the cost of such securities on a cost-to-cost basis without any additional fee, markup or commission, the circular clarifies that such reimbursement cannot be treated as an import of services and is accordingly not liable to goods and services tax. However, where the foreign holding company charges any additional fee, markup or commission over and above the cost of the securities, the circular treats such additional amount as consideration for a supply of services of facilitating or arranging the transaction in securities,on which goods and services tax is leviable and payable by the Indian subsidiary on a reverse charge basis.

Conclusion

Cross-border ESOPs involving a foreign holding company and Indian subsidiary employees sitat the intersection of FEMA, income tax and corporate law, with additional accounting and GST considerations where the foreign parent bears or recharges the cost of the awards. Careful attention to the conditions under Schedule III to the OI Rules, the classification of the investment as OPI or ODI, applicable Form OPI reporting, determination of FMV, taxation and withholding on the ESOP perquisite, and subsequent capital gains and foreign asset disclosure requirements is essential to mitigate regulatory and tax risk.

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