- The perquisite is fair market value on the exercise date minus the amount paid, under section 17 of the Income-tax Act, 2025.
- The payroll employer deducts TDS on it under section 392, in the month of exercise.
- Under RBI’s Master Direction on Overseas Investment, ESOP shares up to 10% of the foreign company’s capital, without control, are overseas portfolio investment.
- For that investment, Form OPI is filed by the employer concerned.
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How is ESOP taxation in India worked out at exercise?
As salary, when the employee exercises. Not at grant, not at vesting.
The perquisite rules in section 17 value the shares at fair market value on the exercise date, reduced by what the employee paid. Any later sale is a capital gain.
Let’s say a Pune engineer exercises 1,000 options in your US parent at an exercise price of ₹300 a share, when fair market value is ₹1,800. Her salary is ₹30 lakh a year.
| Step | Figure |
|---|---|
| Fair market value (1,000 × ₹1,800) | ₹18,00,000 |
| Amount paid (1,000 × ₹300) | ₹3,00,000 |
| Taxable perquisite | ₹15,00,000 |
| Extra tax at 30% plus 4% cess | ₹4,68,000 |
Her total income stays under ₹50 lakh, so no surcharge applies. The EOR adds the ₹15 lakh to that month’s TDS on salary and shows it on her annual certificate.
The start-up tax deferral won’t usually help here. It depends on the employer being an eligible start-up, and the DPIIT recognition route covers Indian companies.
What do FEMA rules say about foreign-parent ESOPs?
They treat the shares as an overseas investment by the employee, so check eligibility before you grant.
Under the RBI Master Direction on Overseas Investment, ESOP shares up to 10% of the foreign entity’s paid-up capital, without control, count as OPI. Exercise payments count toward the employee’s Liberalised Remittance Scheme limit.
Here’s the grey area. The FEMA ESOP route is worded for employees of the overseas company’s own Indian office, branch or subsidiary. Someone employed by an employer of record doesn’t fit that wording neatly. Take FEMA advice before you grant.
What are the alternatives to ESOPs for EOR staff?
Cash-settled awards. They give the same upside without foreign shares.
| Option | Shares acquired? | Tax point |
|---|---|---|
| Stock options from the parent | Yes, overseas | Perquisite at exercise |
| Phantom stock | No | Salary when paid |
| Cash-settled SARs | No | Salary when paid |
With no foreign shares, the overseas investment route isn’t engaged. Confirm with the bank anyway. Our guide to EOR tax implications covers the wider payroll picture.
How does Remunance handle ESOPs for your India team?
Remunance runs the exercise perquisite through payroll as the legal employer, deducts TDS and reports it on the annual salary certificate. Where FEMA eligibility is the blocker, we also handle India subsidiary formation, including moving EOR staff to your own entity. To plan equity for India hires before you grant, talk to an India payroll specialist about ESOPs.
What else do people ask about ESOPs for EOR employees?
Can an EOR employee receive stock options from a foreign company?
Yes, in principle. The parent grants them, but FEMA eligibility for EOR staff is unclear, so take advice first.
When are ESOPs taxed in India?
Twice. At exercise, as a salary perquisite. Then on sale, as capital gains.
Who deducts TDS on ESOPs for EOR staff?
The employer that runs payroll, which is the EOR. It adds the perquisite to salary in the month of exercise.
Planning a hire in India?
Our founding team has run payroll and hiring in India for 22+ years, first as Remunance Systems, which was later acquired by ADP.