Everything NRIs need to know about ESOP taxation in India and the US, double taxation, Form 1116, and IRS compliance

Overview: ESOP Taxation for NRIs in USA

If you're an NRI living in the USA, a Green Card holder, or a US tax resident, you are required to report your global income to the Internal Revenue Service (IRS), which includes any Employee Stock Option Plans (ESOPs) received from Indian companies.

In this comprehensive guide, we explain:

• How Indian ESOPs are taxed in India
• How US residents are taxed on foreign ESOPs
• How to avoid double taxation using Form 1116
• What to report in your US tax return (Form 1040) and Schedule D
• Capital gains tax on sale of ESOP shares in India and USA

🇮🇳 ESOP Taxation in India for NRIs

If you are working with an Indian company that grants you ESOPs, here’s how the taxation works in India:

Tax at the Time of ESOP Exercise

When your stock options vest and you choose to exercise them, the difference between the Fair Market Value (FMV) on the exercise date and your exercise price is treated as salary income.

Example:
Let’s say Ankit, an Indian professional now living in the US, exercised 200 stock options in 2023:

• Exercise Price = ₹100/share
• Fair Market Value on exercise date = ₹350/share
• Taxable Perquisite = ₹250 × 200 = ₹50,000
• Tax Paid in India (approx. 31%) = ₹15,500

This perquisite income is taxable in India under the head "Income from Salary", and taxes are deducted by the employer via TDS (Tax Deducted at Source).

🇺🇸 Taxation of Indian ESOPs in USA

The IRS taxes global income, so foreign ESOP income is also subject to US tax. If you're a tax resident of the USA, you must:

• Report ESOP income as part of your salary or "Other Income" in Form 1040
• Convert Indian income to USD using the IRS average exchange rate
• Claim a foreign tax credit for Indian taxes paid using Form 1116

Continuing the Example:

• ₹50,000 = $625 (assuming ₹1 = $0.0125)
• Add $625 to your US income
• Claim a foreign tax credit of up to $193 (₹15,500 converted to USD)

Important: The tax credit allowed is limited to the amount of US tax applicable on that foreign income. Always consult a cross-border tax expert to calculate the maximum allowable foreign tax credit.

Capital Gains on Sale of ESOP Shares: India vs USA

Once you exercise the ESOPs, you may eventually sell the shares. Here’s how that transaction is taxed:

Long-Term Capital Gains (LTCG)

• Tax Rate: Increased to 12.5% on specified assets.
• Exemption Limit: Hiked from ₹1 lakh to ₹1.25 lakh per year (on total LTCG).

Short-Term Capital Gains (STCG)

• Tax Rate: 20% for certain specified assets.
• Other STCG: Taxed at your applicable income tax slab rate.

Example:
If Ankit sells 200 shares at ₹450/share:

• FMV at exercise = ₹350
• Selling price = ₹450
• Capital Gain = ₹100 × 200 = ₹20,000
• Tax (if LTCG and within exemption limit) = ₹0

🇺🇸 Capital Gains Tax in the USA

In the US, capital gains from the sale of foreign shares (including Indian ESOPs) are fully taxable:

• Report the gain in Schedule D of your Form 1040
• Short-term gains (held < 1 year) are taxed at ordinary income tax rates
• Long-term gains (held > 1 year) are taxed at 15–20%

Even if the gains are tax-free in India, you must pay tax in the US.

How to Avoid Double Taxation of Indian ESOPs in the USA

The best way for NRIs to avoid double taxation on Indian ESOPs is to:

• Report your ESOP income and capital gains correctly in the US
• Use Form 1116 to claim a foreign tax credit
• Maintain detailed records of:
  • Exercise dates and FMV
  • Sale price and date of sale
  • Taxes paid in India (with Form 16)
  • Exchange rates used for conversion

Work with a qualified NRI tax consultant or CPA familiar with cross-border taxation

US Tax Forms You Must Know as an NRI with Indian ESOPs

Final Thoughts: Tax Planning for NRIs with Indian ESOPs

Employee Stock Options from Indian companies can be extremely rewarding, but they bring complex tax obligations—especially when you live in the United States. With the right tax planning, record-keeping, and professional support, you can legally reduce or eliminate double taxation.

At Dinesh Aarjav & Associates, we offer:

• Cross-border NRI tax filing (India + US)
• ESOP taxation advisory
• Form 1040 and Form 1116 preparation
• Capital gains tax planning
• End-to-end compliance for Indian Americans

Need Help with ESOP Taxation in the USA and India?

Let our expert NRI tax advisory services help you stay compliant and tax-efficient.