Foreign employee stock options: Documentation, taxation and disclosure requirements in India Any tax liability for dividend received and capital gains at the time of sale should be dispensed by the employee via advance tax payment
Many tech employees get stocks of their parent companies listed abroad as part of their salary packages. Here's a look at the documentation, taxation and disclosure requirements in India for these stocks.Q.What are the types of employee stock options?
ESOP (Employee Stock Option Plan): The shares are allotted at a future date on the fulfilment of certain conditions, at a predetermined price.RSU (Restricted Stock Unit): The shares are allotted at a future date on fulfilment of certain conditions, at zero cost.ESPP (Employee Stock Purchase Plan): The shares are allotted at a future date on fulfilment of certain conditions, at a predetermined discount to the prevailing market price.Phantom shares: These aren’t actual shares, but mimic price movement of actual shares.Q.Which documents are needed to assess the stock value for taxation?
Broker demat account statements: These are available with the foreign broker’s login. These give a clear view of stocks exercised and sold, dividend income, taxes withheld on dividend income, and closing balance of stocks at the end of the period.Employer’s stock option management portal: You can extract reports by ‘type’ and ‘status’ of employee stocks. These give a clear split of stocks vested in the relevant financial year, their fair market value on vesting date, amount paid by employee (if any) to exercise, sales made during the period, and exchange rate conversion in Indian rupee.Form 12BA: This is an annexure of Form 16. It depicts the gross value of exercised stocks as per their fair market value, reduced by the amount paid by employee, if any. It is shown as value of perquisites.Salary slips: Sometimes the stocks don’t vest evenly through the year. Salary slips show the exact month of vesting and perquisite amount a month in that accounting period.Q.How does the employer handle the TDS?
Suppose an employee receives 30 stocks as RSUs on vesting date. As soon as vesting occurs, 10 stocks are sold to cover the tax liability at slab rate, and the balance 20 stocks are held in demat account. This is done to offset the cash impact of taxes in the year of vesting. Vesting does not result in any cash gains as stocks are unsold, but tax outflow in cash is still due at this event. This approach by employers takes care of the TDS outflow without impacting the in-hand salary. The TDS by an employer is deducted only on value of perquisites in the year of vesting.
Q.What is taxed as value of perquisites in Form 16?
In case of employee stocks, say, for RSUs, the difference between the fair market value on the date of exercise, and the value it was allotted at (usually zero) is the value of perquisites. Similarly, for ESPPs, the discount offered on fair market value is the value of perquisites. This benefit is taxed at slab rate. This is available in Form 12BA as part of Form 16.
Q.What are taxable events and rates?
The employee stocks and derived income are taxed at three levels.
At the time of exercise: The difference between fair market value on date of exercise and amount paid by employee, if any, is taxed at slab rate as a value of perquisite.At the time of sale: The difference between fair market value on the date of exercise and selling price is taxed as capital gain. The holding period is counted from the date of exercise. If it’s more than 24 months, it is long-term capital gain, taxable at 20% with post-indexation benefit. If the period is lesser, it is short-term gain taxable at slab rate.At the time of dividend receipt: Gross dividend is taxed at slab rate as income from other sources.Q.What if tax is withheld in foreign jurisdiction?
Tax withholding will depend on the laws of foreign jurisdiction.
In the US, for instance, dividends count as income and will be subject to 25% tax, as per the India-US double taxation avoidance agreement (DTAA).The other gain that investment in foreign stocks can generate is capital gain on sale of stocks. There is no capital gains tax in the US for non-resident aliens.To claim credit for taxes in India, a statement of foreign income offered to tax, and foreign tax deducted or paid on such income has to be submitted in Form 67. The details of tax relief claimed for taxes paid outside India have to be reported in ‘Schedule TR’ of ITR to avoid double taxation.Q.Which exchange rate is used?
To convert foreign currency into Indian rupee, the SBI TTBR is used. You will need to check the rate on the last day of the month immediately preceding the month in which the dividend is declared, distributed, or paid by the company. The same concept applies to capital gains. Practically, this is only needed to convert dividend income and determine capital gain income. For vested stocks, the employer converts it at the required rates and shows the gross value in Form 16 as value of perquisites.
Q.What if the foreign jurisdiction follows calendar year?
For taxpayers with foreign assets in India, the ITR form requires disclosure of assets held at any time during the calendar year if it is followed in the foreign jurisdiction. For instance, while filing for assessment year 2023-24, individuals must declare all foreign assets held from 1 January 2022 to 31 December 2022. This is because most countries follow calendar year for assessment, unlike India, where financial year runs from 1 April to 31 March. Hence, even if one bought foreign stocks in March 2022, these would need to be declared in Schedule Foreign Assets, despite falling in the previous fiscal year as per India’s fiscal calendar. While disclosing foreign investments and stocks purchased during the year, these should be reported in Table A3, under schedule FA. Dividends are taxable in the year of accrual and not necessarily dependent on their remittance to India.
Q.What else should be kept in mind?
As a part of the Schedule Foreign Assets, the brokerage account should also be reported along with employee stocks. The sale proceeds from employee stocks also need to be repatriated to India within 90 days as per the exchange control laws. The employer only takes care of the tax liability via TDS at the time of vesting. Any tax liability for dividend received and capital gains at the time of sale should be dispensed by the employee via advance tax payment.
(Shubham Agrawal is Senior Taxation Adviser, TaxFile.in.)
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This story originally appeared on: India Times - Author:Faqs of Insurances
