ESOPs vs RSUs: Taxation for Indians returning from abroad

Indian professionals returning from overseas assignments are being urged to review how their equity pay will be taxed once they’re back home, as employers roll out broader stock awards. The core rule is simple but has big consequences for cash flow and compliance: ESOPs are taxed at exercise and again at sale, while RSUs are taxed at vesting and again at sale. Those two moments—exercise/vesting and sale—determine when income gets added to your salary for Indian tax, and when capital gains rules apply later.

Tax officers treat the value you receive as a “perquisite” (a salary benefit) at the point you gain the shares. For ESOPs, that’s the day you buy the shares by paying the exercise price. The perquisite equals the Fair Market Value (FMV) on the exercise date minus the exercise price, and it is taxed as salary. For RSUs, that salary event happens at vesting, because you usually don’t pay anything; the perquisite equals the FMV on the vesting date.

When you later sell the shares, the gain is taxed as capital gains. For ESOPs, your cost for capital gains is the FMV on exercise; for RSUs, it’s the FMV on vesting. The capital gains rate depends on how long you held the shares before selling.

Key cross-border drivers: residency and foreign tax

Returnees face extra layers beyond the basic rules. Two factors drive most outcomes:

• Residential status in the year of exercise or vesting.
• Whether foreign tax was already paid on the perquisite or gain.

If you were a non-resident when your RSUs vested abroad, that perquisite may be taxed in that country. If you move to India and sell later, India will typically tax the capital gain at sale, while the perquisite part may remain outside India’s scope if you qualified as non-resident at vest and the perquisite relates to services rendered abroad.

Similarly, for ESOPs exercised while abroad, the perquisite is usually foreign-sourced, with Indian tax applying only if you were resident at exercise. The crux for many families is timing: a few months’ difference in when you exercise or when shares vest can change where the perquisite is taxed.

According to analysis by VisaVerge.com, return migration is rising among tech and finance workers who often hold a mix of ESOPs and RSUs. Many returnees discover mismatches between foreign payroll withholding and India’s tax year, creating taxation gaps that require careful reconciliation in the first Indian filing season back.

Policy context and cross-border relief

India’s network of Double Taxation Avoidance Agreements (DTAA) is meant to prevent the same income from being taxed twice. If you paid tax in the foreign country on ESOP or RSU income, you may claim a foreign tax credit in India—subject to limits—so you don’t pay double.

To claim credit you must:
– Keep documentation of the tax paid abroad, the country, the nature of income (perquisite vs capital gains), and the period it relates to.
– File Form 67 before you file your Indian return (see official guidance at: https://www.incometax.gov.in/iec/foportal/help/form67).

If you qualify as RNOR (Resident but Not Ordinarily Resident) in the initial years after returning, India generally taxes only:
– Income that is received or arises in India, and
– Income from business controlled or a profession set up in India.

Many returnees use this limited window to manage when ESOPs are exercised or when RSUs vest, aiming to confine the perquisite event to the foreign tax net while they are RNOR. That said, skilled planning is needed because global equity plans often have fixed vesting calendars, blackout periods, and employer withholding rules.

Reporting and disclosure duties

Disclosure duties expand when you return. If you hold foreign shares acquired via ESOPs or RSUs, you must:

• Report them in your Indian Income Tax Return under Schedule FA (Foreign Assets).
• Show foreign-source income in Schedule FSI.
• If claiming foreign tax credit, file Form 67 before the return and retain supporting documents (foreign payslips, tax forms, broker statements).

The Income Tax Department explains the process on its portal; see Form 67: Statement of Foreign Income and Tax Credit. Missing these steps can delay refunds or lead to disallowance of credits already withheld overseas.

How India splits the equity life cycle

India’s tax treatment splits the equity life cycle into two parts:

• Salary event
  • ESOPs: Tax arises at exercise on the gap between FMV and exercise price (perquisite under salary income).
  • RSUs: Tax arises at vesting on FMV at vest (perquisite under salary income).
• Capital gains event
  • Both ESOPs and RSUs: Tax applies when you sell the shares, on the difference between the sale price and the earlier FMV used at exercise (ESOPs) or vest (RSUs).
  • The rate and classification depend on holding period:
  • Sell soon after vest/exercise → short-term capital gains.
  • Hold longer → long-term capital gains, different rates and indexation may apply.
  • Plan type (listed overseas, U.S.-listed, private company pre-IPO) affects exact rates and treatment.

Practical problems returnees face

Returnees often face three practical problems.

1. Cash for tax at the salary event
   • With RSUs, employers usually withhold shares to cover tax upon vesting.
   • With ESOPs, you may need funds for the exercise price and the perquisite tax due in India if resident at exercise.
   • This can be a heavy outlay before you can sell, especially if sales are restricted.
   • Planning the exercise date around your residency status can reduce cash pressure.
2. Double taxation risks
   • Without DTAA relief, you could pay perquisite tax abroad and again in India.
   • To claim credit in India, complete Form 67 and include details in Schedule FSI, backed by foreign payslips, tax forms, or broker statements.
   • India allows credit only to the extent of Indian tax on that same income, and timing must align with the year the income is taxed in India.
   • Important: Late filing of Form 67 can lead to denial of credit—file it before your return.
3. Repatriation of sale proceeds from foreign brokers
   • If you exercised options as an NRI through an NRE account, sale proceeds are typically fully repatriable.
   • If you exercised as a resident and later became NRI, funds might land in an NRO account, where remittance caps can apply (often up to USD 1 million per financial year, subject to documentation).
   • The Reserve Bank of India’s FEMA rules set these corridors. Before selling a large block:
     • Check your account classification.
     • Verify the route your broker uses for payouts.
     • Confirm whether you’ll need a certificate from a chartered accountant to remit funds.

Real-world illustration and human choices

A software lead returning from the United States may hold overlapping grants: RSUs vest quarterly, while a legacy ESOP from a prior employer allows exercise within 90 days of leaving.

• If she lands in India in June and becomes resident for that tax year, an October RSU vest becomes a salary event in India.
• But if an ESOP exercise occurs before she breaks Indian residency—say in April while still abroad—the perquisite may be taxed overseas, with India taxing only later capital gains when she sells.

The order and location of these events can move the needle on total tax and cash flow by lakhs of rupees.

Compliance habits to reduce risk

Several routine steps reduce exposure:

• Keep a timeline for each grant: grant date, vesting dates, exercise dates, sale dates, and your residency status for each tax year.
• Match documents: offer letters, grant notices, vesting statements, broker trade confirms, FMV proofs at exercise/vesting, and tax withholding slips.
• Note FMV sources: listed shares use market quotes; private shares may rely on plan-provided valuations. Retain the source used for perquisite calculations.
• Track currency conversions used when computing perquisites and capital gains in INR.

Experts warn about “trailing” grants. If RSUs continue to vest after you come back based on work performed both abroad and in India, some countries apply workday allocation across the vesting period. In such cases, a portion of the perquisite may be taxed abroad even after you’ve returned, while India taxes the whole or a share depending on its rules. DTAA can reduce double hits, but only if filing is tight and Form 67 is done on time.

Keep an eye on payroll slips from your overseas entity and ask HR to provide country-wise tax reports for each vest.

Employer and payroll coordination

Employers are adjusting too. Large multinationals now push out guidance to returning staff about FMV calculations, withholding, and how to claim foreign tax credits in India. Payroll teams often coordinate with offshore brokers to deliver year-end statements that match Indian reporting needs, including the FMV used at vest or exercise. This reduces disputes in scrutiny and helps employees avoid errors in Schedule FA and FSI.

For official rules and procedural guidance, the Income Tax Department’s portal provides detailed help pages and forms. Employees claiming foreign tax credit must file Form 67 before filing their Indian return; instructions are available at the department’s site: Form 67: Statement of Foreign Income and Tax Credit. Adhering to these steps supports DTAA relief, reduces double taxation, and keeps your first year back on firmer ground.

Key takeaway: Timing and paperwork matter. A modest change in vesting or exercise date, or a late Form 67, can ripple through your tax bill. Plan early, document well, and coordinate with your employer’s equity and payroll teams before you move.

Practical action checklist:
1. Create a grant timeline and mark your residency status for each relevant tax year.
2. Gather and match all supporting documents (grant, vesting, exercise, FMV, payslips, broker confirmations).
3. File Form 67 before your return if you expect to claim foreign tax credit.
4. Check bank account types (NRE/NRO), repatriation rules, and FEMA limits before selling.
5. Discuss possible vesting deferral/acceleration or exercise timing with your employer where plans allow.

The bottom line for returnees is clear: ESOPs trigger salary tax at exercise and capital gains at sale; RSUs trigger salary tax at vesting and capital gains at sale. Residential status, DTAA relief, RNOR years, and repatriation rules can change outcomes in material ways. Plan early, document thoroughly, and coordinate with your employer to reduce surprises.