Sold company shares received from your employer? Here’s what to report in your ITR

Many employees assume that since tax was deducted through payroll when the shares were allotted or vested, there is nothing further to disclose. However, the subsequent sale of those shares triggers a separate capital gains tax event that must be accurately reported in the income-tax return. 

Where the shares are issued by a foreign parent company, taxpayers may also have additional reporting obligations under Schedule Foreign Assets (Schedule FA), even if no sale has taken place during the year, subject to the applicable disclosure requirements. 

Understanding the distinction between salary taxation, capital gains taxation and foreign asset reporting, while maintaining proper documentation and reconciling disclosures with Form 16, AIS and broker statements, can help taxpayers avoid reporting errors, unnecessary notices and prolonged scrutiny.

How are employer stock grants taxed?

Whether the shares are issued by an Indian employer or a foreign parent company, taxation generally takes place in two stages. The first tax event arises when the employee exercises ESOPs or when RSUs/stock grants vest and the shares are allotted. 

At this stage, the difference between the fair market value (FMV) of the shares and the amount paid by the employee, if any, is taxed as a perquisite under the head “Salary”, and the employer generally deducts tax through payroll.

The second tax event arises when the employee subsequently sells the shares. The difference between the sale consideration and the cost of acquisition is taxed as capital gains. 

Where the shares belong to a foreign company, taxpayers should additionally evaluate whether Schedule Foreign Assets (Schedule FA) reporting is applicable based on their residential status.

Allotment tax vs sale Tax: What’s the difference?

Tax at allotment is linked to employment. The value of the benefit received from the employer is taxed as salary and is generally subject to TDS through payroll.

Tax at the time of sale is an investment-related tax. Only the appreciation or depreciation occurring after the employee acquires the shares is taxed as capital gains. The value already taxed as salary becomes the cost of acquisition, thereby avoiding double taxation.

“For foreign employer shares, taxes may also be withheld outside India on allotment, dividends or sale. Depending upon the applicable DTAA and Indian tax provisions, eligible Foreign Tax Credit (FTC) may be available subject to prescribed conditions,” said Akhil Chandna, Partner, Global People Solutions Leader, Grant Thornton Bharat. 

ITR filing: How to disclose gains from employer shares?

Most salaried taxpayers will generally report these transactions in ITR-2, unless business or professional income requires filing ITR-3. 

Capital gains should be disclosed in Schedule CG. However, taxpayers receiving foreign employer shares may have additional disclosure requirements. 

“Resident and Ordinarily Resident (ROR) taxpayers may need to disclose foreign shares and overseas brokerage accounts in Schedule FA, while foreign taxes claimed as credit may require reporting in Schedule FSI and Schedule TR, along with timely filing of Form 67,” stated Chandna. 

Further, the aforesaid shares would also be required to be disclosed in Schedule AL cases where the employee’s total taxable income exceeds Rs 1 crore during the relevant tax year. 

Taxpayers should keep the following documents ready:

• Form 16 showing the perquisite taxed through salary.
• ESOP, RSU or stock grant agreements.
• Vesting and exercise statements.
• Broker contract notes and sale confirmations.
• Fair market value adopted for salary taxation.
• Dividend statements, if applicable.
• Foreign tax withholding certificates, wherever relevant.
• Form 67, where Foreign Tax Credit is claimed.
• Exchange rate workings for foreign shares.
• Brokerage statements and computation of capital gains.

How is the cost of acquisition calculated for ESOPs and RSUs?

The cost of acquisition is generally the fair market value that was considered while computing the taxable perquisite when the shares were allotted or exercised. This principle applies equally to domestic and foreign employer shares.

“For foreign shares, taxpayers should also ensure that the cost and sale consideration are converted into Indian Rupees in accordance with the prescribed Income-tax Rules, since incorrect exchange rate conversion can materially affect the capital gains computation,” said Chandna. 

Bought shares at different prices? Here’s how to calculate capital gains

Each allotment or vesting should ordinarily be treated as a separate lot because every tranche may have a different acquisition date, acquisition cost and holding period.

For foreign employer shares, every tranche may additionally involve different foreign exchange rates at the time of acquisition and sale.

Accordingly, taxpayers should maintain detailed tranche-wise records rather than computing gains using a consolidated average cost.

Capital gains: How is the holding period determined?

The holding period generally begins from the date on which the employee acquires ownership of the shares, i.e., the date of allotment or exercise in the case of ESOPs and the date of vesting/allotment in the case of RSUs or stock grants. The original grant date is not relevant for determining the holding period.

For listed shares of an Indian company, a holding period of 12 months or less results in short-term capital gains (STCG), while a holding period of more than 12 months qualifies as long-term capital gains (LTCG).

For unlisted shares, including shares of many foreign parent companies that are not listed on a recognised Indian stock exchange, the threshold is 24 months. Accordingly, gains arising on shares held for 24 months or less are treated as STCG, whereas shares held for more than 24 months qualify as LTCG.

How to reconcile employer share sales with AIS and Form 26AS?

For domestic employer shares, taxpayers should reconcile Form 16, AIS, Form 26AS and broker statements before filing the return. 

For foreign employer shares, taxpayers should additionally reconcile overseas brokerage statements, foreign tax withholding certificates, dividend statements and foreign bank or brokerage records. 

Since overseas transactions may not always be fully reflected in AIS, taxpayers should retain independent documentation supporting the computation. Where Foreign Tax Credit is claimed, the foreign taxes disclosed should reconcile with Form 67, Schedule FSI and Schedule TR.

Employer shares? Avoid these tax filing mistakes

According to Chandna, common mistakes include:

• Using the exercise price instead of the FMV as the cost of acquisition.
• Calculating the holding period from the grant date instead of the allotment or exercise date.
• Clubbing multiple vesting tranches into one computation.
• Ignoring brokerage or allowable transfer expenses.
• Assuming that tax deducted through payroll eliminates further reporting obligations.
• Failing to disclose foreign shares in Schedule FA, where applicable.
• Claiming Foreign Tax Credit without filing Form 67 or completing Schedule FSI and Schedule TR.
• Applying incorrect exchange rates for foreign shares.
• Ignoring dividend income received on employer shares.

Can you receive a tax notice even after TDS?

Tax deducted by the employer covers only the salary perquisite arising on allotment or vesting. It does not discharge the employee’s responsibility to correctly report the subsequent sale or any other reporting obligations.

A notice may therefore arise if the sale transaction appearing in AIS has not been reported, capital gains have been incorrectly computed, 

Form 16 and the return do not reconcile, Schedule FA has not been completed despite holding reportable foreign shares, Foreign Tax Credit has been claimed without satisfying the prescribed conditions, or foreign income has not been appropriately disclosed.

With increasing exchange of information between tax authorities and greater use of data analytics by the Income-tax Department, taxpayers should ensure that both domestic and foreign employer shares are accurately reported, all applicable disclosures are completed, and supporting documentation is maintained.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.

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