Income Tax Appellate Tribunal: ESOP Exercise Date Fair Market Value Rules India-Linked Gains Taxable After Dubai Move

The Mumbai Bench of the Income Tax Appellate Tribunal dismissed a Dubai-based bank employee’s appeals over ESOP benefits linked to services performed in India. The dispute covered assessment years 2013-14 and 2014-15.

The employee exercised the options after moving to Dubai and becoming a non-resident in India. The tribunal held that this later status did not change where the underlying income accrued.

The decision date is unclear. November 2026 is when the case was reported, not an established date for the tribunal’s ruling.

The case concerns the tax treatment of the ESOP perquisite. It does not decide the tax on a later share sale.

The appeals covered benefits tied to the employee’s earlier India work

The employee worked for a private sector bank in Mumbai when the options were granted. The perquisite values assessed were Rs 72.77 lakh for AY 2013-14 and Rs 83.59 lakh for AY 2014-15, about Rs 1.56 crore combined. Those are perquisite values, not a tax bill or a realized share-sale gain.

The bank withheld Rs 22.48 lakh in tax on the AY 2013-14 benefit. The employee sought Rs 20.44 lakh in relief under Section 90, arguing that India could not tax the ESOP income after his move.

An assessing officer rejected the claim, and the Commissioner of Income Tax (Appeals) upheld that decision before the employee appealed to the tribunal.

The options were granted before the move and exercised years later

The bank granted options for 18,500 shares on June 27, 2007, at an exercise price of Rs 219.74 per share. The employee moved to the bank’s Dubai representative office on October 1, 2007.

Half the options vested on June 27, 2008, and the remainder on June 27, 2009. He exercised them in AY 2013-14 and AY 2014-15, by then a non-resident in India.

A March 2021 legal alert described an earlier Mumbai tribunal case with matching dates and values. The matching details do not establish that the cases involved the same employee.

The tribunal traced the benefit to employment services in India

The employee relied on Section 5(2) of the Income Tax Act, arguing that a non-resident is taxable in India only on income received, accruing or arising there. Because he worked in Dubai when the options vested and were exercised, he said the benefit arose from services outside India.

He also invoked Article 15 of the India-UAE tax treaty, which covers employment remuneration. The tribunal accepted that ESOPs can qualify as similar remuneration, but said treaty treatment depends on where the employment underlying the benefit was exercised.

The bench linked the options to services the employee had performed in India when they were granted. It held that non-resident status at exercise did not change where the underlying income accrued.

Section 17(2)(vi) sets when an ESOP perquisite is taxed, generally at exercise. The tribunal said that timing rule did not alter where the benefit had accrued. It also observed that options linked to services in the UAE could receive treaty protection, including in an example involving exercise after a return to India. That does not make all options exercised by non-residents exempt.

A separate ruling sets exercise-date value for a later share sale

The perquisite ruling is distinct from the Mumbai tribunal’s decision in Rajesh R. Hemrajani, a UK-resident taxpayer’s case. In ITA No. 1284/Mum/2025, published July 31, 2026, the tribunal addressed how to calculate capital gains when ESOP shares are sold.

Indian ESOP taxation can involve two points: a salary perquisite when options are exercised, then capital gains when shares are sold. In Hemrajani, the tribunal said the fair market value on the ESOP exercise date could be used as the cost of acquisition for that later calculation, even though the perquisite had not been taxed in India. The Revenue had argued for the actual exercise price instead.

The tribunal’s interpretation of Section 49(2AA) was: “Section 49(2AA) does not require the ESOP perquisite to have been taxed in India.” It rejected a distinction between perquisites taxed in India and those taxed overseas. The Dubai employee’s appeal concerned the India tax treatment of the perquisite, not this separate cost-basis question.

Employment records can show where the option benefit was earned

Employees with cross-border options should review grant and vesting details, deputation documents and employment records, including where they performed services. The timeline can help distinguish benefits linked to India work from those tied to work elsewhere.

Divya Bhanushali, a chartered accountant and Head of Product at TaxBuddy, said:

“For employees who have worked in more than one country, the grant and vesting details, deputation documents and employment records become important while determining the tax treatment of ESOP benefits.”

A qualified tax professional can assess how those facts apply to an individual’s circumstances.