Equity-based rewards have long been a part of pay structures. As careers now often span multiple jurisdictions, the resulting tax outcomes have become more layered and, at times, more complex than they initially appear.
One feature of equity compensation is how the timing of tax aligns with cash flows. Stock-based compensation is taxed at allotment / exercise, often before any cash is realised. Take for instance, an employee in India receiving Restricted Stock Units (RSU) from a foreign parent company. When the shares are allotted, tax is triggered in India based on the fair market value as on the date of exercise / allotment reduced by any sum recovered from the employee, as perquisite under salary income.
Now, if part of the vesting period overlaps with time spent outside India, more than one country may try to tax a portion of the same income. Meaning, for a Resident and Ordinarily Resident (ROR) individual, the home country (India) will continue to apply tax withholding on the total income, while the host country will also tax the income on a proportionate basis based on services rendered there. This will result in double taxation and hence, the need to claim treaty relief.
Change in residential status adds a layer. If an individual qualifies as a Non-Resident or Not Ordinarily Resident, income from RSUs and stock options is usually split based on services performed in India during the vesting period.
While there is no inheritance tax in India, many foreign countries have this concept of inheritance tax applicable on the beneficiaries in case of death. Thus, shares held in foreign parent companies will be subject to a high inheritance tax, if not properly planned.
Taxation of dividends
In addition to perquisite taxation, dividends from such shares are also taxable. For Indian residents, dividends received from foreign companies are taxed as income under “Income from Other Sources” at applicable slab rates.
There may also be withholding tax on dividend income in the country where the ultimate holding company whose shares are issued is based. While credit for this tax is available in India under tax treaties, practical issues around timing and documentation can arise.
Tax at sale
When the shares are eventually sold, any further increase in value (step-up) from the date of exercise or allotment till the date of sale is taxed as capital gains.
Now, some individuals assume that the earlier tax event covers everything or rely mainly on Form 130 (erstwhile Form 16) from their employer. This can lead to gaps, especially when shares are held or sold through foreign brokerage accounts that are not reflected in salary statements.
Compliance and reporting
Equity held or transacted through overseas accounts often requires additional reporting beyond standard payroll disclosures. The impact of the above is visible only over time, shaping choices such as when to sell shares, how much to hold, and how to assess compensation offers.
The writer is tax partner, EY India. Inputs from Shanmuga Prasad, director, EY India
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.