Have You Reported Your Foreign Assets in Your Income Tax Return?

Foreign Assets

Have You Reported Your Foreign Assets in Your Income Tax Return?

Foreign Assets

In an increasingly globalized world, it’s common for Indian residents to hold assets or earn income abroad. However, what many fail to realize is that the Indian Income Tax Act mandates disclosure of foreign assets and overseas income in the Income Tax Return (ITR). Failure to do so—whether by oversight, lack of awareness, or deliberate omission—can have serious consequences.

Let’s take a closer look at what qualifies as foreign assets, the reporting obligations under Indian law, and the penalties for non-compliance.

Who Needs to Report Foreign Assets?

Any individual who qualifies as a Resident in India under the Income Tax Act must report their foreign assets and income while filing their ITR—regardless of the value of such assets.

Foreign Assets

Examples of Common Foreign Assets:

  • ESOPs or Shares allotted by a foreign parent company to employees working in MNCs

  • Bank accounts opened abroad while on temporary work assignments or during overseas education

  • Properties held overseas, even after returning to India

  • Investments in foreign mutual funds, stocks, bonds, or other financial instruments

  • Equity or ownership interests in overseas businesses, such as companies or LLPs

Additionally, any income generated from foreign sources—whether from employment, interest, rent, or capital gains—must also be reported in the ITR.

Foreign Tax Credit (FTC): Avoiding Double Taxation

If you’ve already paid taxes on your foreign income in another country, you can generally claim a Foreign Tax Credit (FTC) in India to avoid double taxation. However, to do so, you must:

  • Offer the foreign income to tax in India in the same financial year

  • File Form 67 along with documentary evidence like the foreign tax payment receipt or TDS certificate

How Does the Government Know About Your Foreign Assets?

This is where the Automatic Exchange of Information (AEOI) comes in.

India is a part of a global network of over 100 countries that have agreed to share financial information about each other’s tax residents. This means:

  • Financial institutions such as banks and investment firms collect information like your name, account details, balance, and income earned

  • This data is shared between tax authorities of the respective countries under the AEOI framework

  • For instance, India shares financial data of U.S. tax residents with the U.S. IRS, and receives similar information about Indian residents from the U.S.

This framework ensures greater transparency and enables Indian tax authorities to verify whether foreign income and assets have been correctly disclosed.

Consequences of Non-Disclosure

Failing to report foreign assets and income can lead to severe penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, also known as the Black Money Act:

1. Monetary Penalty

A penalty of ₹10 lakh per year can be levied if the aggregate value of the unreported foreign assets (excluding immovable property) exceeds ₹20 lakh.

2. Prosecution

Imprisonment from 3 to 10 years along with fines for willful non-disclosure.

3. Tax and Additional Penalties

  • Tax is levied at a flat 30% on the undisclosed income, with no exemptions or deductions allowed.

  • Additional penalties of up to 300% of the tax may also be imposed.

4. Loss of DTAA Benefits

  • Non-disclosure disqualifies the taxpayer from claiming relief under Double Taxation Avoidance Agreements (DTAA) for the relevant income.

Read More: Faking Tax Deductions? You Could Be Penalised Up To 200% Under Income Tax Rules

Whether you’re a salaried employee receiving ESOPs from a foreign company, a student with a bank account abroad, or a returning NRI with overseas investments—reporting your foreign assets and income is not optional. It is a legal responsibility that should not be taken lightly.

If you are unsure about your reporting obligations or need help claiming a Foreign Tax Credit, consult a qualified tax professional. Proactive compliance not only protects you from heavy penalties and prosecution but also builds a credible tax record for the future.

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Tax Implications of ESOPs and RSUs for Employees

ESOPs

Tax Implications of ESOPs and RSUs for Employees

ESOPs

Employee Stock Option Plans (ESOPs) and Restricted Stock Units (RSUs) have become increasingly popular as part of employee compensation packages, especially in multinational corporations and startups. These instruments are not just used to reward performance but are key tools in retaining talent. However, the tax implications associated with ESOPs and RSUs can be complex and often misunderstood.

Understanding ESOPs and RSUs

Before diving into taxation, it is crucial to understand the fundamental differences between ESOPs and RSUs:

BasisESOPsRSUs
Choice to receiveEmployee has the option to buy shares at a predetermined priceShares are automatically granted after the vesting period
Type of CompaniesCommon in startups or growth-stage companiesMore prevalent in established and mature companies
Cost to EmployeeRequires payment of the exercise price (usually lower than FMV)Granted free of cost
Primary ObjectiveEmployee retention through deferred ownership benefitsEmployee retention with assured share allocation

Typically, ESOPs and RSUs are offered during onboarding and vest after a specified period. Let’s now look at how taxation works in India for both instruments.

Stage 1: Taxation as Perquisite under "Income from Salary"

For ESOPs:

Tax liability arises when the employee exercises the vested options. The taxable perquisite is calculated as:

Perquisite = Fair Market Value (FMV) on Exercise Date – Exercise Price Paid

This perquisite value is treated as part of salary income and taxed at the applicable slab rate.

For RSUs:

RSUs are taxed when the shares are allotted to the employee after the vesting period. Since RSUs are allotted free of cost, the entire FMV on the allotment date is treated as a perquisite.

Perquisite = FMV on Allotment Date

Again, this is taxed as “Income from Salary”.

Stage 2: Taxation under "Capital Gains"

Once shares from ESOPs or RSUs are allotted and taxed as perquisites, any subsequent sale of these shares results in capital gains or losses.

Capital Gain = Sale Price – FMV on Date of Exercise (for ESOPs) / Allotment (for RSUs)

The nature of capital gain—short-term or long-term—depends on the holding period from the date of exercise/allotment to the date of sale. If listed shares are held for more than 12 months, they qualify as long-term capital assets.

Illustration: Taxation of ESOPs – Step-by-Step Example

Let’s understand this with a practical example:

Scenario:

  • An employee joins in February 2023

  • Offered 1,000 ESOPs, exercisable after 1 year at a price of Rs. 7,500 per share

  • In February 2024, options vest and the FMV is Rs. 8,000

  • Employee exercises all options by paying Rs. 75,00,000 (1,000 × Rs. 7,500)

Stage 1: Perquisite Taxation

  • FMV on exercise = Rs. 8,000

  • Exercise price = Rs. 7,500

  • Perquisite = Rs. (8,000 – 7,500) × 1,000 = Rs. 5,00,000

This Rs. 5,00,000 is added to salary income for FY 2023–24 and taxed accordingly.

Stage 2: Capital Gains Taxation

  • Employee sells the shares in May 2025 at Rs. 10,000 per share

  • FMV on exercise (cost of acquisition) = Rs. 8,000

  • Capital Gain = Rs. (10,000 – 8,000) × 1,000 = Rs. 20,00,000

Depending on the nature of the gain (short-term or long-term), appropriate capital gains tax is applied.

ESOPs

Key Takeaways

  • Both ESOPs and RSUs are taxed in two stages:

    1. As perquisites under “Income from Salary”

    2. As capital gains on sale of shares

Read More: Why Reconciling AIS and TIS is Crucial Before Filing ITR

  • For ESOPs, employees need to pay to exercise the options, and the perquisite is the difference between FMV and exercise price

  • For RSUs, since they are allotted free of cost, the full FMV is taxable as salary

  • Planning the timing of exercise and sale is essential to optimize tax liability

  • Ensure that capital gains records are maintained, especially for unlisted shares

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Compliance Checklist for ESOPs Under Companies Act 2013

ESOPs

Compliance Checklist for ESOPs Under Companies Act 2013

ESOPs

Employee Stock Option Plans (ESOPs) have emerged as a powerful tool for companies to attract and retain talent, especially in start-ups and growth-stage enterprises. By offering employees the opportunity to become shareholders, companies foster a sense of ownership, loyalty, and long-term commitment. ESOPs not only reduce immediate cash outflows by replacing hefty cash rewards but also align employee performance with company growth.

What is ESOP and Who is Eligible?

a) Definition under the Act

Section 2(37) of the Companies Act, 2013 defines Employee Stock Option (ESOP) as the option given to the directors, officers, or employees of a company, its holding, or subsidiary company to purchase or subscribe to shares at a predetermined price on a future date.

ESOPs

b) Eligible Recipients

Employees eligible for ESOPs include:

  • Permanent employees of the company, whether based in India or abroad.

  • Directors of the company (excluding independent directors).

  • Employees of the company’s holding or subsidiary company (domestic or overseas).

Not Eligible:

  • Promoters or persons from the promoter group.

  • Directors holding more than 10% of the company’s equity (directly or indirectly through relatives or entities).

Exception: In case of DPIIT-recognized startups, the above disqualifications are relaxed for a period of 10 years from incorporation.

Key Timelines & Terms: Grant, Vesting, Exercise & Allotment

a) Grant Date

The date on which the company formally grants the options to eligible employees.

b) Vesting Period

The time span between the grant date and the point when an employee earns the right to exercise the options. Minimum vesting period: 1 year.

In the case of mergers or amalgamations, prior holding periods under previous ESOPs may be counted towards the vesting requirement.

c) Exercise Period

Post vesting, this is the timeframe within which employees can exercise their vested options.

d) Exercise Price

The price set by the company for employees to acquire the shares. It can be at a discount or premium but must not be below the par value.

e) Lock-in Period

The period during which employees are restricted from selling the allotted shares. The company has discretion in determining this duration.

Step-by-Step Procedure to Issue ESOPs (Direct Route)

  1. Check Articles of Association (AOA):
    Ensure the AOA authorizes the issuance of ESOPs. If not, amend the AOA accordingly.

  2. Board Meeting:
    Convene a Board Meeting (with at least 7 days’ notice) to:

    • Approve the ESOP Scheme.

    • Approve calling of an Extraordinary General Meeting (EGM).

  3. EGM Notice:
    Send the notice with explanatory statements to all stakeholders at least 21 days before the meeting.

  4. Shareholder Approval:

    • Private Companies: Ordinary Resolution.

    • Public Companies: Special Resolution.

  5. Mandatory Disclosures:
    Disclose all details as mandated under the Act and relevant rules in the EGM explanatory statement.

  6. Grant of Options:
    Once approved, issue the ESOP grants to eligible employees.

  7. ROC Filings:
    File Form MGT-14 with the Registrar of Companies within 30 days of shareholder resolution.

  8. Maintain Registers:
    Maintain Form SH-6 – Register of Employee Stock Options. Entries must be made promptly.

  9. Share Allotment Post Exercise:
    After the vesting period, on receiving exercise requests from employees, convene a Board Meeting to allot shares under the ESOP scheme.

Rights and Restrictions for Employees Holding ESOPs

  • Resignation or Termination:
    Unvested options lapse. Vested options may be exercised within a specified time as per scheme terms.

  • Transferability:
    ESOPs are non-transferable and cannot be pledged, mortgaged, or encumbered.

  • In the Event of Death:
    All granted options vest immediately and may be exercised by legal heirs or nominees.

  • In the Event of Permanent Incapacity:
    All granted options vest immediately upon incapacity.

Read More: Income Tax Return (ITR) Filing for AY 2025-26: Essential Documents You’ll Need

When implemented correctly, ESOPs can significantly boost employee morale, commitment, and performance. They serve as an excellent alternative to high cash compensation while driving employee alignment with company goals. However, the success of an ESOP Scheme hinges on robust legal compliance, clear documentation, and strict adherence to statutory provisions under the Companies Act, 2013 and relevant rules.

Proper planning, timely filings, and transparent communication are critical to avoid legal pitfalls and ensure long-term benefits for both the company and its employees. A well-structured ESOP plan is a strategic investment in talent that can accelerate a company’s growth trajectory.

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