Case note · Tax, Company law
The Unexplained Foreign ESOP gaps – Where the Company’s Compliance Ends and Yours Begins
A question from the floor
Last week I was at the BCIC conference in Bangalore on the new Income Tax Act, 2025 and its Rules. Most of what I took away from it was technical. One question from the Q&A was not.
An attendee asked whether holding ESOPs in his company’s US parent had put him in trouble. My senior answered it on the spot, and my firm has since written about the disclosure side of it, so I won’t repeat that here. What I kept coming back to was a different question, i.e. how does someone end up asking it at all? His employer had deducted tax at exercise, Form 16 showed it, and his return was filed and by every signal the system had given him, he was done. So, I spent the week since reading the law governing ESOPs, trying to work out where that signal goes missing and this blog contains what I found.
A framework built around the company
Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 sets out the grant, vest and exercise sequence for ESOPs. It is a well-trodden framework. What I find interesting is not what it covers, but what it doesn't.
Almost every ESOP obligation in India belongs to the company: shareholder approval of the scheme, and Form MGT-14 for that resolution, the register of ESOPs in Form SH-6, the return of allotment in Form PAS-3 when shares are allotted and TDS on the perquisite at exercise, reported in Form 24Q and passed on to the employee in Form 16.
A company can do every one of these correctly, and the employee will never see any of it, except as a number in Form 16. For an employee of an Indian company holding Indian shares, that is mostly fine. The system is designed so that the employee does not need to do much. The trouble begins when the employee assumes that the same is true everywhere.
Let’s change one fact in the above framework
Now change one fact: the shares are in a foreign parent company. Suddenly, three obligations land on the individual.
- The perquisite tax at exercise. The Indian employer still deducts tax on this and it is the one obligation that reliably gets done, and that is exactly why people assume the file is closed. The tax has been deducted, Form 16 shows it, and the employee moves on.
- Schedule FA. This is where the file quietly stays open. Schedule FA in the return is triggered by holding a foreign asset, not by earning from one. It applies whether or not you sold, and whether or not there was a gain. A resident who simply holds parent company shares must report them, along with their initial, peak and closing values and any income from them and here is the catch most people miss, Schedule FA runs on the calendar year, while the rest of your return runs on the financial year. The period the tax department looks at for your foreign holdings is not the period you have been thinking in.
- The LRS ceiling. Under the Overseas Investment Rules, 2022, a resident may acquire foreign ESOP shares without any limit. But the value of what is acquired counts against the USD 250,000 Liberalised Remittance Scheme limit for that year. For someone who also sends money abroad for education, travel or investment, that can matter more than they realise.
The point is not that any of these is complicated. It is that none of them reaches the employee automatically. They sit outside the company's compliance calendar, and the employee usually finds out about them late, or from a question at a conference.
The Indian employer is not a bystander
When I started reading, I assumed the Indian entity was a bystander in all of this. The shares belong to the parent, and the obligations belong to the employee. It turns out that is not quite right.
Where the acquisition qualifies as overseas portfolio investment (OPI), the Indian employer files Form OPI with the RBI twice a year, by the end of May and by the end of November. The form reports the opening balance, investments, disinvestments and closing balance of its employees' foreign holdings.
Before 2022, the equivalent filing was annual, and it did not apply to cashless ESOPs at all. The OI framework does not distinguish between cashless and cash-based exercises, so that exemption is gone.
This means the company is already asking its employees for this information, not once but twice a year. And collecting it is harder than it sounds. The investment and disinvestment figures are personal investment details, employees are often reluctant to share them, and there is no RBI guidance on how a company should gather them.
So, the conversation already exists. The company asks, the employee answers, and that is where it stops, with no explanation of why the numbers matter.
The paragraph nobody added
A company that emails its employees every May and November asking what they did with their parent company shares is already holding the employee's attention on exactly the right subject. It could, in the same email, tell them why those numbers matter on their own return, and that the period the tax department cares about for foreign assets is the calendar year, not the financial year.
It would not take much. Something like this:
The figures we are asking for are needed for our RBI reporting. You may need similar information for your own income tax return. Foreign shares you hold, including those received under the parent company's ESOP plan, are generally reportable in Schedule FA, even if you have not sold them. Schedule FA follows the calendar year (January to December), not the financial year. These shares may also count towards your annual LRS limit. Please speak to your tax advisor if you are unsure.
To be fair to companies, there are good reasons this paragraph usually isn’t there. It is not the employer’s duty to guide employees on their personal tax filings and a finance or HR team that starts explaining Schedule FA risks being seen as giving tax advice, with the trouble that could follow if an employee relies on it and gets it wrong. So, it makes sense that staying silent is the safer choice, and an understandable one.
That is why I think the nudge has to come from the regulator. The RBI has not given clear guidance on how companies should collect this information in the first place. When it does, it might as well advise companies to include a short, standard heads-up in the request to employees on what the information is for, and that the same holdings may need to be reported in the employee’s own return. A standard note from the regulator takes away the company’s worry about overstepping, and gives the employee the context they are missing.
Which brings me back to the conference. Maybe that question needed to be asked only because nobody had ever added that one paragraph to the email that simply explains why.