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Mahesh Padmanabhan |120 Answers |Ask -Follow

Tax Expert - Answered on May 05, 2023

Mahesh Padmanabhan has specialised in payroll, personal and corporate taxation for more than two and a half decades, enabling him to provide practical, realistic and correct advice to his clients.
He is a member of The Institute of Chartered Accountants of India and has a degree in cost accounting from the Institute of Cost Accountants of India.
He is also a qualified information systems auditor. ... more

Question by Vijay on Apr 30, 2023Hindi

What are the tax implications on the foreign company ESOP sell profits?

Ans: Hi Vijay

I am assuming that you are referring to sale of foreign shares held under ESOP grant held by an employee.

In case you have held the ESOP share for more than 24 months then it would be treated as Long Term asset. You could index the cost and any gain resulting from the calculation would be taxed at 20%

If the period of holding is shorter then the gain (if any) would be taxed at your slab rate.

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Question by Shivashankar - Nov 13, 2020Hindi

I would like to know regarding the long term capital gains tax for foreign shares. Scenario: Employee is working in a MNC based out of US. He gets ESOP and in June 2017, it vests. He wants to sell it in 2020 (more than 24 months and hence long term capital gains). Say the total amount of incremental gain by selling the stocks that vested in June 2017 is 5 lakh INR. My main question is: 1) Is the LTCG tax 10 per cent of the gains - i.e 10 per cent of 5 lakh? OR 2) Is the LTCG tax 20 per cent of the gains - i.e 20 per cent of 5 lakh? Any reference to the income tax laws (links) will be very helpful.

Ans: Foreign shares held by an individual for more than 24 months are treated as long-term capital assets and otherwise is treated as short-term capital assets. Capital gain from sale of long-term capital assets would be taxed at 20 per cent with the indexation on the purchase price or at 10 per cent flat without such indexation benefit.

Capital gains from sale of short-term capital assets would be added to income and taxed at the slab rates applicable for the individual.

Considering this as an ESOP, taxation is calculated at two stages. At the time of allotment of shares and on sale of shares.

The income is determined based on the difference of the fair market value (FMV) of shares on the date of allotment and the amount paid to acquire such shares. This income is treated as perquisite and taxed as part of salary income at the applicable slab rates.

In the second part, tax is applicable at the time of sale of shares wherein the income would be the difference between the sale proceeds and the cost of acquisition of shares (based on the FMV of the share).

Tax needs to be paid on this and tax payable is based on the tenure as explained above.

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