Indian ESOP Taxation in the USA for NRIs & US Residents

As an NRI living in the United States, a green card holder, or a US tax resident, you must report your global income to the IRS. And this global income also includes any Employee Stock Option Plans (ESOPs) you have received from any Indian company(s).

Understand the tax implications of Indian ESOPs in the United States so that you can plan your taxes effectively. In this blog, we will talk about US taxation of Indian ESOPs in the United States, how you can avoid double taxation by using Form 1116, what you must respond to while filing your US tax return, and more, so that you can stay compliant with US tax laws. 

ESOP taxation in India for NRIs

Let us start with the basics. Assume you are working with an Indian company that offers ESOPs; here's how taxation will work in India for an NRI.

When your stock options vest and you exercise them, the difference between the Fair market value (FMV) on the date of exercise and your exercise price is treated as your salary income. 

Let us put it together in an Example.

Assume Mr. Shivam is an Indian professional who no longer lives in the United States and exercises 200 stock options in 2023. 

• The price of exercise: Rs 100 per share
• FMV on the date of exercise: Rs 350 per share
• Taxable prequisite: Rs 250 * 200 shares = Rs 50,000
• Tax paid in India (approximately 31%) = Rs 15,500

The taxable prequisite income is taxed under the "Income from Salary" head, and the employer deducts taxes via TDS (tax deducted at source). 

Taxation Of Indian ESOPs in the USA

As the Internal Revenue Service (IRS) taxes the global income of its residents, your foreign ESOP shares' income will also be subject to the US tax. 

So if you are a US tax resident, you must: 

• Report your income from ESOPs as part of your salary under the "Other Income" head while filing your US tax return (Form 1040). 
• To report the ESOP shares income, convert your Indian income to USD using the IRS average exchange rate. 
• By filing Form 1116, you can claim the foreign tax credit for taxes you have paid in India. 

Continuing the example we discussed above. 

Rs 50,000 = $625 ( assuming that Rs 1 = $0.0125). 

Now, add $625 to your US Income and claim the foreign tax credit of almost $193, which is Rs 15,500 in indian currency.

Please note that the tax credit is allowed only up to the amount of US tax that would apply to that foreign income. Hence, an individual needs to consult a cross-border taxation expert to calculate the allowable foregin tax credit they can claim. 

Capital Gain on Sale of ESOP Shares: India vs the United States

Once you can exercise the ESOPs, you might eventually be selling the shares. If so, this is how your transactions will be processed. 

Long-term capital Gains (LTCG)

• The tax rate on the specified assets is increased to 12.5%. 
• The exempted limit has been increased from Rs 1 lakh to Rs 1.25 lakh for a financial year on total long-term capital gains. 

Short-term capital gains (STCG)

The tax rate is 20% on the specified assets.

Other short-term capital gains are taxed at your applicable income tax slab rate. 

Continuing the example. 

If Ankit sells 200 shares at Rs 450 per share, then:

• The fair market value price at the time of exercising is Rs 350
• The selling price is Rs 450. 
• Capital Gain= Rs 100* 200 = 20,000 Rs. 
• Tax would be Rs 0 as the LTCG is within the exemption limit. 

Capital Gain Taxation In The United States

In the United States, capital gains from the sale of foreign shares, including Indian ESOPs, are fully taxable in India. 

• Report the capital gain in Schedule D of your Form 1040. 
• Short-term gains (held for less than a year) are taxed at the normal income rates. 
• Long-term gains (held for more than 1 year are taxed at 15-20%. 

Now, even though the capital gains are tax-free in India, you will have to pay taxes in the United States. 

Ways To Avoid Double Taxation Of Indian ESOPs in the USA

The following are the best ways for NRIs to avoid double taxation on Indian ESOPs. 

• As an NRI, ensure that you report the ESOP's income and capital gains accurately in the United States. 
• You must use Form 1116 to claim the foreign tax credit.

Please keep the detailed records of:

• Fair Market Value and Exercise Dates
• Sale price and the date of sale
• Taxes paid in India (with Form 16)
• Exchange rates used for conversion

US Tax Form For NRIs In the US With Indian ESOPs.

As an NRI living in the USA with Indian ESOPs, these are the US Tax forms and schedules that you must know about and will help you understand US tax on Indian ESOPs better.

The Bottom Line

Yes, Employee Stock Options (ESOPs) from Indian companies are nothing short of a reward. However, this reward is subject to complex ESOP tax treatment in the USA.

But with the right NRI tax planning and guidance, these complex tax obligations won't feel as complex, and you can legitimately reduce or eliminate the taxation of ESOPs entirely. 

For professional guidance like no other, connect with Savetaxs. Our experts bring more than 30 years of combined experience and have been serving NRIs in the USA for decades.

Our experts will help you with tailored cross-border NRI tax filing consultations in both India and the United States, ESOP taxation advisory consultations, preparation of US tax forms such as Form 1040 and Form 1116, and capital gains tax planning for ESOPs. 

In a nutshell, Savetaxs provides end-to-end compliance support to Indian Americans in every aspect of NRI taxation.

Hence, for high-end NRI consultancy services in India, connect with us—we serve our clients 24/7 across all time zones.