ESOPs Taxation: If you work for a multinational company and hold Employee Stock Option Plans (ESOPs) or Restricted Stock Units (RSUs) of a foreign parent entity, you may have already received an income
tax alert — or could be next.
In recent months, the Income Tax Department has intensified its outreach to employees whose returns show gaps in reporting foreign shareholdings or overseas-linked benefits. These communications are not routine scrutiny notices but part of a broader compliance drive focused on undisclosed foreign income and assets, enabled by enhanced data analytics and global information-sharing mechanisms.
What is triggering these notices now
India currently receives financial information from overseas jurisdictions under global reporting frameworks such as the Common Reporting Standard (CRS), the Foreign Account Tax Compliance Act (FATCA), and the Automatic Exchange of Information (AEOI). This allows tax authorities to cross-check income tax disclosures against data shared by foreign employers, brokers and custodians.
Any mismatch — including non-disclosure of foreign ESOP shares — is automatically flagged by the system.
“Where a mismatch is detected, for instance overseas bank accounts, foreign shareholdings, ESOPs/RSUs granted by foreign parent companies, or other overseas assets that are not reported in Schedule FA (Foreign Assets) or where related income is not reported in Schedule FSI (Foreign Source Income), the system may flag the discrepancy and issue a compliance alert or income tax notice,” said CA Suresh Surana told moneycontrol.com.
These alerts are part of the Central Board of Direct Taxes’ ‘NUDGE’ initiative, aimed at encouraging voluntary correction before matters escalate into scrutiny or penalty proceedings.
Which ESOPs qualify as foreign assets
Not all ESOPs require disclosure. The crucial distinction lies between future entitlements and actual ownership.
Unvested ESOPs are generally not treated as foreign assets because the employee does not yet have a vested or enforceable right over the underlying shares, Surana explained. He added that the disclosure obligation arises once the ESOPs are exercised. Upon exercise and allotment, the employee acquires beneficial ownership of foreign equity shares, and such exercised ESOPs are regarded as reportable foreign assets regardless of whether they are listed or unlisted, subject to lock-in, or yet to be sold.
In short, disclosure is triggered by ownership of foreign shares, not by their sale or receipt of capital gains.
Where ESOPs must be reported in the ITR
“If the shares belong to the foreign holding company, they are required to be disclosed in Schedule FA (Foreign Assets) and Schedule AL (Asset-Liability). If the employee earns any income on such foreign shares and claims relief of taxes deducted thereon outside India, the details are to be captured under Schedule FSI (Foreign Source Income) and Schedule TR (Tax Relief),” said Maneesh Bawa, Partner, Nangia Global told Moneycontrol.
Upon sale of ESOPs, employees must ensure accurate reporting in Schedule CG (Capital Gains). For disclosure purposes, employees often make a common mistake by reporting market value instead of cost. “Only the cost of such assets in the hands of the employees needs to be disclosed,” Bawa clarified.
Why TDS does not eliminate reporting obligations
Many employees assume that once tax is deducted at source by the employer at the time of vesting, no further compliance is required. This assumption is increasingly resulting in tax alerts.
“While employers generally deduct tax at source on ESOPs, this deduction only addresses the taxability of the benefit and does not substitute the employee’s separate reporting responsibility,” Surana said.
Disclosure of foreign assets is a personal obligation and must be fulfilled irrespective of TDS, lock-in periods, or whether the shares were sold during the year.
“ESOPs received by employees are usually of the foreign holding company. Once ESOPs are exercised in the hands of the employees, such shares are required to be reported in the income tax returns. Usually, employees miss out on capturing these details in the ITRs,” Bawa added.
What to do after receiving an income tax notice
Receiving a compliance alert does not automatically lead to penalties. Most such communications are designed to prompt voluntary correction.
“Upon receiving such communications, employees should first carefully review the nature of the notice or alert to determine whether it is a system-generated compliance nudge, an intimation, or a formal notice under the Income-tax Act, 1961,” Surana said.
Employees should reconcile ESOP details with employer records and overseas custodians, confirm whether foreign shares were held during the year, and ensure accurate reporting in Schedule FA and other relevant schedules. If omissions are identified, a revised or belated return can be filed by December 31, 2025.
Why ESOP compliance can no longer be ignored
ESOPs are no longer just a compensation perk; they now carry a clear compliance responsibility. With global data-sharing becoming routine, disclosure gaps are easily detected by tax systems.
For MNC employees, understanding when ownership begins and knowing exactly where ESOPs must be reported is now just as important as understanding how they are taxed. What may appear to be a small omission is increasingly what is landing tax notices in employee inboxes.
