Published 9 May 2026
Sub-clause (vi) of clause (2) of section 17 of the Income-tax Act, 1961 -- the perquisite charge on grant / vest / exercise / sale, the source-rule allocation between India and the foreign country, the Foreign Tax Credit through Form 67, and the Foreign Exchange Management Act compliance for cross-border stock plans
Taxpayer Brief
Restricted Stock Units and Employee Stock Option Plans of multinational companies routinely follow employees across countries -- granted while the employee is in India, vested while abroad, exercised after returning, sold years later. Each event has a distinct tax treatment in each country, and the source-state vs residence-state allocation depends on where the employee was during the vesting period. This article maps the four-event taxation framework, the standard sourcing rules under Indian law, the foreign tax credit mechanics, and the Foreign Exchange Management Act overlay for cross-border equity plans.
1. The Four Tax Events
Event | What Happens | Indian Tax Treatment |
|---|---|---|
1. Grant | Employer awards a number of Restricted Stock Units / Stock Options conditional on vesting period and continued employment | No tax on grant -- the option is contingent |
2. Vest | Restricted Stock Units convert to actual shares; Stock Options become exercisable; the employee has an enforceable right | Restricted Stock Units: Fair Market Value at vest = perquisite under section 17(2)(vi) read with Rule 3(8); taxed in the year of vesting. Stock Options: typically no perquisite at vest -- delayed to exercise |
3. Exercise | Employee pays the strike price; receives shares | Stock Options: Fair Market Value at exercise minus strike price = perquisite under section 17(2)(vi); taxed in the year of exercise. Restricted Stock Units: typically no second event |
4. Sale | Employee sells the shares at market price | Capital gain = sale price minus cost (Fair Market Value at vest / exercise); taxed under section 112A / 111A / 112 depending on holding period and listing |
The dual-tax pattern Employee Stock Options and Restricted Stock Units are perquisite first (at vest / exercise) and then capital asset (on subsequent sale). The perquisite component is taxed as Salary at slab rate; the subsequent gain is taxed as Capital Gain. Maintaining the cost-basis from the vest / exercise event is essential to avoid double-taxing the same value. |
2. Sourcing -- India vs Foreign Country
The fundamental sourcing question is -- which country has the taxing right over the perquisite? Indian tax law and the Organisation for Economic Co-operation and Development model treaty allocate the perquisite to the country where the employment-services to which the grant relates were performed. For a vesting period spanning multiple countries, the perquisite is allocated proportionally.
Vesting Period Profile | Indian Source Allocation | Foreign Source Allocation |
|---|---|---|
Entire vesting period in India | 100% | 0% |
Entire vesting period abroad | 0% | 100% (subject to foreign tax) |
First half in India, second half abroad (typical Non-Resident Indian who moved mid-vesting) | 50% | 50% |
Granted abroad, vested abroad, but employee returned to India before exercise / sale | 0% on perquisite (allocated to abroad); capital gain on subsequent sale per residential status at sale | |
Granted in India, vested partly in India and partly abroad, exercised in India | Pro-rata over vesting period | Pro-rata over vesting period |
3. Worked Example -- Software Engineer Moved India to United States Mid-Vesting
Mr. Arjun, software engineer, employed by Multinational Software Inc. He was granted 1,000 Restricted Stock Units on 1 January 2024, vesting over four years (25% per year on 1 January 2025, 2026, 2027, 2028). He moved from India to the United States on 1 April 2025 and became United States resident from Tax Year 2025 (United States) onwards. Fair Market Value of the share on each vest date is given below.
Vest Tranche | Vest Date | Fair Market Value per Share | Indian Period in Vesting | Indian Sourcing % |
|---|---|---|---|---|
Tranche 1 -- 250 Restricted Stock Units | 1 January 2025 | $50 | 1 January 2024 to 1 January 2025 -- entirely in India | 100% |
Tranche 2 -- 250 Restricted Stock Units | 1 January 2026 | $60 | 1 January 2024 to 1 April 2025 (in India 15 months out of 24) | 62.5% |
Tranche 3 -- 250 Restricted Stock Units | 1 January 2027 | $70 | 1 January 2024 to 1 April 2025 (in India 15 months out of 36) | 41.7% |
Tranche 4 -- 250 Restricted Stock Units | 1 January 2028 | $80 | 1 January 2024 to 1 April 2025 (in India 15 months out of 48) | 31.25% |
Tranche 2 computation Tranche 2 vests on 1 January 2026 -- 24-month vesting period 1 January 2024 to 1 January 2026. Mr. Arjun was in India 1 January 2024 to 1 April 2025 -- 15 months. Indian sourcing = 15 / 24 = 62.5%. Indian-perquisite value = 250 × $60 × 62.5% = $9,375 ≈ ₹7.97 lakh. Taxable as Salary in India in the year of vesting (Tax Year 2025-26 / Assessment Year 2026-27). United States taxes 250 × $60 × 37.5% = $5,625 (the United-States-period share). Mr. Arjun files Income Tax Return-2 in India as Non-Resident, claims Foreign Tax Credit on the Indian portion (relevant if he was Resident in 2025-26) under section 90 read with the India-United States Double Taxation Avoidance Agreement. |
4. Capital Gain on Subsequent Sale
When the shares are sold, the capital gain is computed as sale price minus cost-of-acquisition. Cost of acquisition = Fair Market Value at vest (already taxed as perquisite). The gain is taxed in the residence state at sale, with the source state getting taxing right only if the underlying asset is a 'share deriving its value substantially from immovable property' or a few other narrow exceptions. For ordinary listed-equity capital gain by a Non-Resident Indian holding shares in a foreign company, India does not tax.
Sale Scenario | Indian Tax Treatment |
|---|---|
Mr. Arjun (Non-Resident Indian in United States) sells the United States listed shares in 2030 for $90 per share | No Indian tax -- capital gain on a foreign-listed share by Non-Resident Indian is not Indian-source |
Same shares; Mr. Arjun returns to India and sells in 2032 (Resident at sale) | Indian tax on capital gain -- holding period from vest determines Long-Term / Short-Term; cost = Fair Market Value at vest |
Mr. Arjun never moves; sells the same shares as Indian Resident in 2030 | Indian tax on capital gain at 12.5% if Long-Term in foreign-listed equity (treated as unlisted for India under Finance Act, 2024 amendment) |
5. Foreign Tax Credit Through Form 67
Where Mr. Arjun is Indian Resident in Tax Year 2025-26 (covered the year of his US move), his global income is taxable in India. The United States tax on the perquisite portion is creditable in India under sub-section (1) of section 90 read with Rule 128. Form 67 must be filed before the Indian Income Tax Return -- containing the foreign tax certificate (United States W-2 / Form 1042-S) and the computation of the credit.
6. Foreign Exchange Management Act Compliance
- Holdings of foreign-listed Restricted Stock Units / Stock Options by an Indian Resident must be disclosed in Schedule FA of the Income Tax Return -- under Sub-Schedule A3 (Equity and debt interest in foreign entity).
- Sale proceeds repatriated to India -- ordinary inward remittance; no special Reserve Bank of India approval if from sale of foreign-listed shares.
- Year-end value of unsold Restricted Stock Units / Stock Options must be reported in Schedule FA at the foreign-broker statement value as on 31 December of the calendar year.
- Disclosure failure attracts the Black Money Act, 2015 framework -- penalty of ₹10 lakh per asset plus prosecution risk.
BharatTax NRI Compliance Tool Is your Non-Resident status reflected in the income-tax department's Permanent Account Number database, and is your Permanent Account Number-Aadhaar status correctly tagged as exempt? Use the NRI Compliance Tool at itr.bharattax.co to verify, update residential status on the e-filing portal, and pre-validate your Non-Resident External or Non-Resident Ordinary bank account for any refund. |
7. Case Law Reference and Anticipatory Legal Analysis
Case Law Reference: NRI ESOP and Restricted Stock Unit taxation Sub-clause (vi) of sub-section (2) of section 17 of the Income-tax Act, 1961 read with Rule 3(8) governs the perquisite valuation of Employee Stock Options and Restricted Stock Units. For NRIs, the source rule under sub-section (1) of section 9 governs whether the perquisite is Indian-source or foreign-source. The Income Tax Appellate Tribunal Bangalore in [VERIFY: confirm Tribunal citation on NRI ESOP source rule] applied the apportionment principle. [VERIFY: cross-check specific Tribunal citations in the BharatTax case-law database.] |
Prospective Interpretation -- The globally-mobile-employee architecture Two unsettled interpretive issues. (i) Treatment of globally-mobile employees with vesting period spanning multiple residential statuses. (ii) Treatment of the foreign-parent-Indian-subsidiary RSU architecture. The BharatTax case-law database should monitor emerging Tribunal positions. [VERIFY: confirm Tribunal decisions emerging on the globally-mobile-employee framework.] |
8. Key Takeaways
- Restricted Stock Units / Stock Options have four tax events -- grant (no tax), vest (perquisite for Restricted Stock Units), exercise (perquisite for Stock Options), sale (capital gain).
- Sourcing -- perquisite allocated pro-rata across countries based on where the vesting-period services were performed.
- Worked example -- Tranche-by-tranche Indian sourcing percentage drops as time spent in India during vesting period decreases.
- Capital gain on subsequent sale -- residence state of the seller at sale; Indian non-tax for Non-Resident Indians selling foreign-listed shares.
- Foreign Tax Credit through Form 67 -- file before the Indian Income Tax Return; supporting United States W-2 / Form 1042-S evidence.
- Schedule FA reporting in the Indian Income Tax Return is mandatory for Indian Resident holders -- Black Money Act exposure for non-disclosure.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.