Taxability of ESOP and Shares outside India

The main idea behind any investment is to earn maximum returns. And this is exactly why investment in foreign stocks is a very good option.

To explain, investing in attractive and scalable global companies can offer huge returns over a long term. For example, had you invested in any of the tech giant companies like Facebook, Apple, Amazon, Netflix, Google, etc about a decade ago, you would have earned outstanding returns by now.

So, if you are a seasoned investor, you can diversify your investments in stocks geographically.

Here is how you can invest in foreign stocks:

You can buy shares of a foreign company using various methods, like,

* Direct Investment or

* Employee Stock Option Plan (ESOP) of an organisation whose parent company is located outside India.

However, tax implications associated with such investments become an important point of consideration for Indian investors.

So, in this article we would like to throw light upon Tax implications on

* Investment in stocks outside India and

* ESOP of parent company situated outside India.

The Truth

A new fast-rising trend among Indian investors is Investment in the foreign stock market.

For the uninitiated, yes, Indian citizens can invest in the shares of the foreign companies that are listed on foreign stock exchanges. But they should hold less than 10% stake in the entity in which the investment is being made, and must not have any control over it.

Yes, Indian citizens can buy stocks of companies like Amazon, Apple, Microsoft etc. How?

By:

* Either opening an overseas trading account with an Indian broker having tie-up with international brokers, such as, ICICI Direct, HDFC Securities, Kotak Securities, and Axis Securities etc.,

* Or by directly opening an account with a foreign broker having presence in India like Charles Schwab, Ameritrade, Interactive Brokers, etc.

Also, since multinational companies are recruiting employees from across the globe today, the Employee Stock Option Plan is another way of investing in the parent company which is situated outside India.

The employee who agrees for ESOP scheme can acquire the stocks of the Employer Company if he fulfils certain conditions like completion of specified number of years in the company or meeting the company's revenue target etc. as defined by the company.

On realization of the conditions proposed by the employer company, the ESOP is vested with the employees.

Overseas entities often grant shares under the Employee Stock Option Plan to the Indian residents who are employed with, or are directors of, an office or branch of the parent company situated in India.
Resident individuals can acquire shares under Employee Benefits Scheme offered by such overseas entities, whether listed or unlisted, up to 10% of its paid-up capital at a predetermined rate (mostly below overall market value of shares).

ESOP has mutual benefits for the employer and his employees.

By offering ESOP, the employer can retain a talented workforce, save cash flows, increase productivity and achieve enhanced profitability. This enhanced profitability further results in increased market value and intrinsic value of the employer company’s shares, while the employee is motivated to put in his best efforts as the employee benefits if the company benefits, leading to a win-win situation.

Tax Implications associated with Direct Investment

RBI allows investment in foreign companies through many routes like the Liberalised Remittance Scheme (LRS) under FEMA Act, Overseas Direct Investment (ODI), Income Tax Act 1961 compliances, etc. Investors investing in foreign stocks may have to comply with these regulations laid down by the Government of India.

To determine tax applicability, firstly we have to determine the residential status of the taxpayer. The residential status of the taxpayer would be dependent upon the number of days for which the individual has resided in India during the relevant previous year.

Based on the above calculation, residential status can be classified as under:

1. Resident and ordinarily resident (ROR) – For residents, all income earned and received globally is taxable in India.

2. Resident but not ordinarily resident (RNOR) – Taxability arises only when foreign income is received or accrued in India from a business or profession controlled or set up in India.

3. Non-resident (NR) – Income is taxable only when foreign income is received or earned in India.

After determining the residential status, capital gain would arise when foreign stocks are sold higher than the purchase price. However, capital gain can further be divided into two categories depending on the holding period of the investment:

* Long Term Capital Gain

* Short Term Capital Gain

Long Term Capital Gain

Long Term Capital Gain arises when the shares of foreign company have a holding period of more than 24 months or two years. Long Term Capital Gain from the sale of foreign stocks will be taxable at the flat rate of 20% along with health and education cess (plus surcharge, if applicable) along with the indexation benefit on cost of the investment.

Short Term Capital Gain

Short Term Capital Gain would arise if shares of the foreign company have a holding period of upto 24 months or 2 years. Short Term Capital Gain is added to the taxpayer's total income and is taxable at individual slab rates.

Tax Implications via Employee Stock Option Plan

Employee Stock Option Plan gives the right to Indian employees to subscribe to shares of the parent company at a predetermined rate (usually below the market price). Although, the difference between the fair market value and the exercise price is taxable in the hands of the employee as "perquisite."

Further, when shares are disposed of, the difference between the sale price and fair market price at the time of sale would be taxed as capital gain. Tax rate applicable at the time of sale would be the same as in case of direct investment depending upon the holding period of the option by the employee.

Reporting in Income Tax Return Form

As per Income Tax Act, it is mandatory for every taxpayer holding foreign stocks or earning income from overseas entities, to file income tax return in India, irrespective of the basic exemption limit.
In income tax returns, the taxpayer must disclose all foreign investments with overseas entities in Schedule-FA of ITR 2 or ITR 3, depending on the nature of income; failing which he could invite penal actions.

Moreover, India has entered into Double Taxation Avoidance Agreement (DTAA) with more than 95 countries which can help you to claim tax credit taxation.

Summing Up

While evaluating an investment in foreign stocks or in overseas entities, one must not only determine the returns based on income and capital appreciation potential or fluctuation of foreign exchange rates but should also consider the after-tax yield from such an investment.

Conclusion: In conclusion, investing in foreign stocks can provide attractive returns over the long term. Indian investors can explore various methods to invest, but they must also consider tax implications and comply with regulatory requirements. Proper evaluation of returns and after-tax yield is essential.

Start maximizing your investment potential today by diversifying into foreign stocks. Take advantage of the opportunities and file your income tax return with confidence. For more Information, Contact us today at info@manishanilgupta.com

Disclaimer: This content is purely for knowledge and educational purposes. It contains only general information and references to legal content. It is not legal advice, and should not be treated as such