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  • Writer's pictureRahul Jain

Have you received US Stock Options? How this will affect your tax planning?

Receiving stock options of a Foreign Country can be super confusing. So many questions go through your mind and you start googling what you need to do. Some of the very basic questions which a person could have are:

1) How these Stock Options will affect my taxes? Do I need to file a US tax return for these? What will be the tax implication for these in India? Can I still just file an ITR-1 using my Form 16 or do I need to hire a Chartered Accountant? What happens if I don't report this income?

I will try to answer all the possible questions a person might have regarding this situation. Let me know in the comments if I miss something:

First, let's understand the different types of stock options and various stages of stock option as the taxation will depend on the below:

The stock option usually has 3 stages:

1) Grant- Your company will offer you the stock options

2) Vested- You become eligible for these stock options

3) Exercise - You decide to buy the stock options

There are two types of possible US stock options:

1) ESOP ( Employee Stock Ownership plan) - The shares of the company are offered to the employee at a discounted price. Eg: If the market price of a company is Rs.50, the shares would be offered to the employees for Rs.45.

2) RSU ( Restricted Stock Unit) - The shares of the company are offered to the employee at a 0 price.

When will I pay tax on these stock options?

There are two stages when you have to pay the taxes on these stock options:

1) When you receive stock options:

The vesting period of the stock options is 0-3 years depending upon the offer made by your company. So after the grant of stock options, you will need to wait for the completion of the vesting period to become eligible for these stock options. If a person is to quit his job before that, they will lose their right to these stock options. Due to this, the stock options are taxed when you finally "Exercise your right" to buy the stock options and not when they are granted.

2) When you sell the stock options or receive dividends on stock options:

After receiving the stock options, a person might decide to keep the shares so that they can sell them at a higher price in future. In this scenario, you might have the following different incomes: Dividends, Capital Gain/Loss on Sale.

How do I pay these taxes in India?

1) When you receive stock options:

Your company will sell either a portion of your shares to cover the taxes or deduct the taxes from your salary or pay it out of their own pockets. (Usually, most of the companies sell a portion of the shares).

2) When you sell the stock options or receive dividends on stock options:

Dividend: Usually the US Company will deduct 25% in taxes before paying out the dividend. The 25% is US Tax. However, you can claim a credit for these taxes in India by filing Form 67. You will need to submit a proof of deduction for the taxes ( US Company will issue a Form 1042-S in the month of January for every calendar year. You will need to keep this form as proof of US tax paid).

If you are on a 30% slab rate, you will need to pay the difference in taxes at the time of filing of your tax return.

Capital Gain: The Tax treatment will depend upon the type of Capital Gain. Whether it's a Short term capital gain or Long term capital gain ( If you have held the shares for more than 24 months, it will be called us Long term Capital gain).

  • Short Term Capital Gain: The income will be added as your regular income and will be taxed at your slab rate

  • Long Term Capital Gain: The capital gain will be taxed at the rate of 20%. You might have to pay the advance tax for this.

On what amount do I pay these taxes?

  • Original Grant: The stock options will be considered as part of your salary. The Fair Market Value of the shares will be added to your salary as perquisites. This will be automatically included on your Form 16. So you don't have to do any calculations.

  • Capital Gain: The difference between Sale Price and Cost Price will be your capital Gain. The Fair Market Value of the Original Grant will be considered as the Cost for the calculations.

  • Dividend: The amount of dividend that you receive in your US Brokerage Account.

Any other tax rules that I should be aware of?

The income tax department asks every person holding stock options to report their Foreign Assets on the tax return. So you will need to file ITR-2 instead of ITR-1. If these shares are not reported to the Govt on tax return, they might be considered as "Unreported Income" and you might receive a tax notice from the Income-tax department to explain the nature of these accounts. As per the DTAA, the US Tax Agency shares all your information regarding the Foreign Assets to Indian Govt. So the income tax department can easily track down the unreported assets of Higher Value.


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