When U.S. stocks are given to an employee in India, taxation can be complex due to the international nature of the income and the need to consider tax regulations in both the United States and India. Here’s a simplified overview of how taxation generally works for such cases, keeping in mind that tax laws are subject to change and can vary based on specific circumstances. Always consult a tax professional for advice tailored to your situation.
1. At the Time of Granting Stock Options:
In general, if the stock options are granted to the employee but not vested, there is no immediate tax implication in India. The taxation event occurs at the time of exercise.
2. At the Time of Exercise:
When an employee exercises their stock options (i.e., buys the stock), the difference between the exercise price and the fair market value (FMV) of the shares is taxed as a perquisite (a benefit in addition to salary) under the head “Salaries.” This is subject to income tax according to the individual’s income tax slab rates in India.
3. At the Time of Sale:
When the employee eventually sells the stocks, the gain from the sale is subject to capital gains tax. The tax rate depends on whether it’s a short-term or long-term capital gain:
- Short-term Capital Gains (STCG): If the stocks are held for less than 24 months from the date of exercise, the gain is considered short-term and is taxed according to the individual’s income tax slab rates which is applicable.
- Long-term Capital Gains (LTCG): If the stocks are held for more than 24 months, the gain is considered long-term and is taxed at 20% with indexation benefits, which adjust the purchase price for inflation to calculate the gain.
4. Double Taxation Avoidance Agreement (DTAA):
India has a DTAA with the U.S., which means taxpayers can avoid being taxed twice on the same income. If taxes are paid in the U.S. on the income from the sale of stocks, you may be eligible for a credit for those taxes against your tax liability in India. The specifics depend on the DTAA provisions and should be reviewed carefully.
5. Tax Filing in India:
It’s important for the employee to disclose international assets and foreign income in their Indian tax return if they qualify as a resident for tax purposes in India.
If you receive the RSU of a foreign company, you must disclose it under the Foreign Asset Schedule (FAS). If you paid taxes at vesting by selling shares, those shares wouldn’t be mentioned in FAS. While selling your RSU holdings, you pay tax only on the profit made and not the entire value of the shares. This also helps in avoiding double taxation
Non-disclosure can lead to penalties and interest and further Scrutiny by the tax department
6. Documentation:
Maintaining detailed records of the dates of grant, exercise, sale, and the amounts involved is crucial for calculating taxes accurately and for compliance with both U.S. and Indian tax laws.
This overview is a simplification, and the actual tax implications can vary greatly based on individual circumstances, specific types of stock options (e.g., ESOPs, RSUs), and changes in tax laws.
We will recommend to Consult with a tax professional who has expertise in cross-border taxation to navigate these complexities.