RSU vs ESOP Tax in India 2026 for Employees of a Foreign Parent

Written by Nihal Srivastava, Krystal7 Consultants. Last updated 1 October 2026.

An ESOP is an option to buy parent shares at a set price, while an RSU delivers the shares free once they vest. Indian tax law treats both as a salary perquisite under section 17(1)(d) of the Income Tax Act, 2025. The value is fair market value under rule 15(6) of the Income Tax Rules, 2026, less any price paid. The Indian employer deducts TDS under section 392. A sale more than 24 months after allotment gives long term gains taxed at 12.5 percent.

This page covers tax points, valuation, payroll TDS, the parent's cross charge, FEMA, the sale, foreign tax credit and the employee's return. Rupee amounts use Indian grouping: INR 1,00,000 is one lakh.

What is the difference between an ESOP and an RSU?

An ESOP (employee stock option) gives the employee a right to buy shares at a fixed exercise price after vesting. An RSU (restricted stock unit) is a promise to deliver shares, usually for no payment, once vesting conditions are met. Indian tax treats both as a perquisite when the shares reach the employee. They differ in the cash each needs and the risk each carries.

Feature	ESOP (stock option)	RSU	ESPP
What the employee receives	A right to buy shares at the exercise price	Shares delivered on vesting	A right to buy shares at a discount from payroll savings
Price the employee pays	Exercise price fixed at grant	Usually nil	Discounted purchase price
When Indian tax arises	On exercise, when shares are allotted	On vesting, when shares are delivered	On purchase
Taxable amount	Fair market value on exercise less exercise price	Fair market value on vesting	Fair market value on purchase less price paid
Head of income	Salary, section 17(1)(d)	Salary, section 17(1)(d)	Salary, section 17(1)(d)
Cash the employee needs	Exercise price plus tax, unless exercise is cashless	Tax only, often met by selling some shares	Payroll savings plus tax
If the share price falls	Worthless below the exercise price	Keeps value while the share trades	The discount protects part of it

Indian law does not use the word RSU. Section 17(4)(e) defines an "option" as a right to apply for shares at a predetermined price. Payroll practice treats an RSU as an option with a nil price, exercised on vesting. We follow that reading.

An option has value only above the exercise price and needs cash on exercise. A stock appreciation right settled in cash is plain salary, taxed through payroll like a bonus.

When is an Indian employee taxed on parent company equity?

The employee pays tax twice. The first charge arises on allotment: on exercise for an option and on vesting for an RSU. That value is salary. The second arises on sale, as a capital gain on the rise after allotment. Grant is not taxed, and neither is the vesting of an option. Dividends are taxed as other income.

Event	ESOP	RSU	Indian tax treatment	Provision
Grant	No tax	No tax	Nothing to report	Section 17(1)(d) taxes allotment, not grant
Vesting	No tax for an option	Shares delivered, tax arises	RSU value is a perquisite	Section 17(1)(d) and 17(4)(h)
Exercise	Tax arises on allotment	Not applicable	Fair market value less price paid	Section 17(4)(h), rule 15(6)
Shares sold at allotment to fund tax	In a cashless exercise	Common (sell to cover)	Capital gain close to nil, still reported	Capital gains; cost under section 73(1)
Dividend	Taxed	Taxed	Other income at slab rates, credit for foreign tax	Section 92; rule 76 and Form 44
Sale	Taxed	Taxed	Long term after 24 months at 12.5%; short term at slab rates	Sections 2(101) and 197

The tax year is the year of allotment, whatever the grant date. A 2023 grant that vests on 16 Jun 2026 produces income in tax year 2026-27 under the Income Tax Act, 2025.

One deferral exists, and it rarely helps a foreign owned subsidiary. Section 392(3) lets an eligible start up under section 140 deduct or pay the tax later, within the time in section 289(3). The department's perquisites page lists the triggers: 48 months from the end of the assessment year of allotment, the employee leaving, or a sale. The relief needs the Indian employer to be an eligible start up.

The text covers an eligible start up "responsible for paying any income of the nature specified in section 17(1)(d)". It does not say whether the start up must issue the shares itself. Before deferring tax on parent shares, get written advice on that point.

Which section of the Income Tax Act, 2025 taxes ESOPs and RSUs?

Section 17(1)(d) of the Income Tax Act, 2025 is the charging clause. It covers the value of any specified security or sweat equity shares that the current or former employer allots or transfers. The allotment may be direct or indirect, free or at a concessional price. The clause replaced section 17(2)(vi) of the Income Tax Act, 1961 from 1 Apr 2026.

The text of section 17 puts the definitions in sub section (4):

1. Clause (a): "fair market value" is the value under the prescribed method, which is rule 15 of the Income Tax Rules, 2026.
2. Clause (e): an "option" is a right, but not an obligation, to apply for the shares at a predetermined price.
3. Clause (f): a "specified security" is a security under section 2(h) of the Securities Contracts (Regulation) Act, 1956. It includes securities offered under a stock option plan.
4. Clause (g): "sweat equity shares" are equity shares issued to employees or directors at a discount or for non cash consideration.
5. Clause (h): the value is fair market value on the exercise date, less the amount the employee paid or the employer recovered.

The parent, not the Indian subsidiary, allots the shares. The words "directly or indirectly" bring that allotment inside the clause. The plan rewards employment with the Indian company, and a recharge makes the link plainer. We do not advise arguing that parent shares fall outside section 17(1)(d).

The words "current employer, or former employer" catch leavers. An option exercised after exit is still salary, and the former employee usually pays the tax through advance tax.

The department's navigator maps old sections to new ones. Our note on what the Income Tax Act, 2025 changed for foreign owned companies covers the wider map.

How is the taxable value worked out?

Take fair market value on the date of allotment, deduct any price the employee paid, and convert to rupees. Rule 15(6) of the Income Tax Rules, 2026 sets fair market value for equity shares. A share listed on a recognised stock exchange uses the average of that day's opening and closing price. An unlisted share uses a Category I merchant banker's value.

The notified Rules (G.S.R. 198(E) of 20 Mar 2026) carry the method in rule 15, which follows old rule 3(8). Rule 15(8) defines the terms. A merchant banker is a Category I merchant banker registered with SEBI. The specified date is the exercise date or any date up to 180 days before it. A recognised stock exchange takes its meaning from section 2(f) of the Securities Contracts (Regulation) Act, 1956.

Situation	Clause of rule 15	Fair market value	What we do
Parent listed on one Indian exchange	15(6)(a)	Average of opening and closing price on the allotment date	Use that day's exchange data
Parent listed on more than one Indian exchange	15(6)(b)	Prices on the exchange with the highest volume	Check the day's volumes
No trade on the allotment date	15(6)(c)	Closing price on the closest earlier date	Record the date used
Parent listed only abroad, such as NASDAQ	15(6)(d) on a strict reading	Merchant banker value	Market average; merchant banker report for large vests
Unlisted parent	15(6)(d)	Category I merchant banker value	Report dated within 180 days before allotment
Security other than an equity share	15(7)	Method in sub rule (7)	Read the sub rule for the instrument

Parent shares listed only abroad

Section 2(f) of the 1956 Act means an exchange recognised by the Central Government under section 4 of that Act. Read strictly, NASDAQ and the New York Stock Exchange do not qualify. A parent listed only abroad then falls under rule 15(6)(d), the merchant banker route. Common payroll practice takes the overseas market price instead. Rule 15 has no clause for a share listed only abroad. Treat the method as a risk point and keep the evidence for each vest.

For routine vests we use the average of the opening and closing price on the overseas exchange, which mirrors clause (a). For large vests we add a merchant banker's report that adopts the market price.

Unlisted parents

A Delaware or UK start up parent is unlisted everywhere, so rule 15(6)(d) needs a Category I merchant banker's value. A US 409A report does not meet that test on its own. A merchant banker can review it and issue an Indian report. Our valuation reports team prepares these for option exercises.

Converting the value to rupees

Rule 15 gives a value in the exchange's currency. Rule 206 converts income arising in foreign currency at the SBI telegraphic transfer (TT) buying rate. For salaries, it takes the rate on the last day of the month before the month in which the salary is due. Rule 207 uses the rate on the date tax must be deducted. It applies only to income payable to an assessee outside India, or to or by an IFSC unit. So rule 207 does not reach a resident employee's perquisite.

Neither rule names perquisites. On our reading the rule 206 salaries row is the one that fits, and we apply it to the month of allotment. We use that one documented rate in payroll, Form 130 and the return.

Must the Indian subsidiary deduct TDS?

Yes. Section 392 of the Income Tax Act, 2025 makes the person responsible for paying salary deduct tax on all estimated salary income. The Indian employer adds the perquisite in the month of allotment. It deposits the tax by the 7th of the next month and reports it in Form 138 each quarter.

Section 392(1) sets the average rate on estimated income for the year. A large vest pushes the estimate up, so payroll recomputes the year's tax and collects the extra in the month of allotment.

The tax can come from three places:

1. Sell to cover. The plan administrator sells enough shares at vesting to fund the tax, and the parent remits the cash to the Indian company.
2. Payroll. The employer recovers the tax from cash salary over one or more months.
3. Employee funding. The employee pays the tax amount before the shares are released.

Obligation	Form or action	Provision	When
Include the perquisite in salary TDS	Payroll computation	Section 392(1)	Month of allotment
Deposit the tax	Challan	Rule 218(2)	By the 7th of the next month; 30 April for March
Quarterly TDS statement	Form 138 (old Form 24Q)	Section 397(3)(b), rule 219	31 Jul, 31 Oct, 31 Jan and 31 May
Salary TDS certificate	Form 130 (old Form 16)	Section 395(4)(b), rule 215(1)	15 June after the tax year
Statement of perquisites, salary above INR 1,50,000	Form 123 (old Form 12BA)	Section 392(5)(a), rule 204(2)	30 April of the following year, per the department's FAQ
Report employees' foreign shares	Form OPI through the AD bank	Regulation 10(3), OI Regulations, 2022	Within 60 days of 30 September and 31 March
Report the parent's recharge	Form 3CEB for FY 2025-26; Form 48 later	Section 92E (1961); section 172 (2025)	31 Oct 2026 for FY 2025-26
GST on any markup	Reverse charge	CBIC Circular No. 213/07/2024-GST	Monthly GST return
Remit the recharge	Form 145, and Form 146 where required	Rule 220; withholding under section 393(2), serial 17	Before the remittance

The Form 138 FAQ gives the four quarterly dates. The Form 130 FAQ sets 15 June after the tax year. The Form 123 FAQ says Form 123 goes out "by 30th of April of the following year". Rule 204(2) names no date. It requires Form 123 where the employee's salary for the tax year is more than INR 1,50,000. We issue Form 123 by 30 April, which also falls well inside the 15 June date for Form 130.

Section 398(1) treats the employer as an assessee in default. Interest runs at 1 percent a month on tax not deducted and 1.5 percent a month on tax not deposited. Section 448 allows a penalty equal to the tax not deducted. Section 427 charges INR 200 a day on a late Form 138, capped at the tax.

We ask the plan administrator for a monthly report of allotments, shares withheld, fair market value and exercise price. Our payroll management service builds this feed into the monthly run.

What happens when the parent cross charges the cost?

A recharge does not change the employee's tax. The subsidiary claims the cost as a business expense, reports it for transfer pricing and checks withholding on the payment. Under CBIC Circular No. 213/07/2024-GST, a recharge at cost attracts no GST, while any markup is taxed under reverse charge.

Area	Effect of a recharge	Provision or source	Settled or open
Employee perquisite	No change	Section 17(1)(d)	Settled
Corporate tax deduction	Claimed as an employee cost	Section 34 (old section 37)	Open on timing and on book only charges
Withholding on the payment	Only if the sum is chargeable in the parent's hands	Section 393(2), serial 17	Open for markups
Disallowance	Expense disallowed if tax was deductible but not deducted	Section 35(b)(ii)	Follows the withholding answer
Transfer pricing	Must be at arm's length	Sections 161 to 173; Form 48	Open on the cost base of a cost plus entity
GST	Nil at cost; reverse charge on a markup, fee or commission	Circular No. 213/07/2024-GST	Settled
PF and gratuity	ESOPs are not wages	Ministry of Labour FAQ 3	Settled by ministry FAQ

The deduction for the Indian company

Section 34 is the general deduction rule in the Income Tax Act, 2025. A recharge paid under a written agreement is a cost the subsidiary bears for its own staff. On our reading it qualifies. Two points stay open.

The first is timing. Ind AS 102 spreads the expense over the vesting period, but the recharge often falls due only on vesting. We claim the deduction when the liability to pay the parent becomes fixed. The second is a book charge with no recharge. The subsidiary then pays nothing, and on our reading a deduction claim is weak.

Withholding and the remittance

Section 393(2), serial 17, needs tax deducted on any sum chargeable under the Act that is paid to a non resident. A recharge at cost repays the parent for shares it issued or bought. On our reading it is not the parent's income. A markup may be business income, which most treaties let India tax only through a permanent establishment.

If tax was deductible and not deducted, section 35(b)(ii) disallows the expense. Our guides to Forms 15CA and 15CB and TDS on payments to non residents cover the mechanics. Form 145 replaced Form 15CA from 1 Apr 2026. Rule 220 lists 33 payments that need no Form 145 or 146, and an ESOP recharge is not among them. So the recharge needs Form 145. Form 146, the accountant's certificate, records the withholding view where required.

Transfer pricing

The recharge is a transaction between associated enterprises under sections 161 to 173. The accountant's report is Form 48 under section 172. For FY 2025-26 the old Form 3CEB still applies, due by 31 Oct 2026.

A recharge at the parent's actual cost, with no markup, is easy to support as arm's length. The harder question is the cost base. A tax officer can argue that equity costs belong in a cost plus base even when the parent bears them.

We include share based costs in the cost base when the parent recharges them. Our note on transfer pricing between a US parent and its Indian subsidiary covers the benchmarking. Rule 89 of the Income Tax Rules, 2026 sets a 15.5 percent safe harbour margin on operating expense for IT services. It covers operating revenue up to INR 2,000 crore. Before leaving share based cost out of the base, read the definition of operating expense in the safe harbour rules and document the position.

GST

CBIC Circular No. 213/07/2024-GST of 26 Jun 2024 covers this case. A foreign holding company issues ESOP, ESPP or RSU shares to employees of its Indian subsidiary. The subsidiary reimburses the cost to cost amount. Securities are neither goods nor services, so the reimbursement is not consideration for a supply.

Paragraph 4.5 sets the limit. Any additional fee, markup or commission is consideration for a service, and the subsidiary pays GST on it under reverse charge. We keep the recharge invoice at cost and bill any fee separately.

PF and gratuity

The Ministry of Labour's FAQ 3 on the labour codes says ESOPs "shall not be part of the wages". Our guide to the new labour codes for foreign owned companies covers the wage test.

Is FEMA approval needed for employees to hold foreign shares?

No RBI approval is needed. Schedule III of the Foreign Exchange Management (Overseas Investment) Rules, 2022 allows the acquisition "without limit". It covers an employee or director of the Indian subsidiary who takes parent shares under an ESOP or employee benefits scheme. The scheme must be offered globally on a uniform basis. The Indian employer reports the holding in Form OPI.

Rule 13 of the Overseas Investment Rules sends resident individuals to Schedule III. Paragraph 3 of that Schedule covers an employee or director of three kinds of Indian entity:

1. An office or branch in India of the overseas entity.
2. A subsidiary in India of the overseas entity.
3. An Indian entity in which the overseas entity has a direct or indirect equity holding.

The Explanation defines an employee benefits scheme as any compensation that gives an ownership interest in the overseas entity, so an RSU plan fits. The rules do not define "globally on a uniform basis". On our reading, Indian staff must join the same plan on the same terms as staff elsewhere. A plan written only for Indian employees needs a check with the AD bank before grant.

Question	Answer	Source
Is RBI approval needed?	No, if the scheme is offered globally on a uniform basis	OI Rules, 2022, Schedule III paragraph 3
ODI or OPI?	OPI if at most 10% of capital and no control	Master Direction on Overseas Investment, paragraph 22(2)
Who reports an OPI holding?	The Indian employer, in Form OPI	Master Direction paragraph 22(5)
When is Form OPI due?	Within 60 days after the half year ending September or March	OI Regulations, regulation 10(3)
Who reports ODI?	The employee, in Form FC	Master Direction paragraph 22(5)
Limit on remittances to exercise options?	No limit, but they count towards the LRS limit of USD 2,50,000	Master Direction paragraph 22(7); RBI LRS FAQ
Can the parent buy the shares back?	Yes, under the plan's offer document, reported through the AD bank	Master Direction paragraph 22(6)

The Master Direction on Overseas Investment, updated as on 1 Apr 2026, holds these paragraphs. Form OPI for the half year ending 30 Sep 2026 is due by 29 Nov 2026. Regulation 11 of the OI Regulations allows a late form with a late submission fee, within three years of the due date. Paragraph 18 of the Master Direction fixes that fee for Form OPI at a flat INR 7,500 per form.

Money going out and coming back

An employee who pays an exercise price from India remits under the Liberalised Remittance Scheme (LRS). The bank collects tax at source (TCS) under section 394 of the Income Tax Act, 2025. The Budget 2026 FAQs keep the rate at 20 percent above INR 10 lakh a year for this purpose. The TCS is a credit in the return. A cashless exercise avoids the remittance and the TCS.

Our FEMA compliance team runs Form OPI and the bank side. The 90 day repatriation rule in regulation 9(4) applies to overseas direct investment, not to an employee's portfolio holding. RBI's LRS FAQ lets an investor who remitted funds under LRS retain and reinvest income from those investments. Foreign exchange not reinvested must come back within 180 days. The FAQ speaks of funds remitted under LRS, so it does not settle shares received without a remittance. Ask your AD bank for its view in writing before leaving sale proceeds abroad.

How is the sale of the shares taxed?

The gain is the rupee sale price less the rupee value taxed as a perquisite. Section 73(1) fixes that cost. Shares of a parent listed only abroad turn long term after 24 months, because the 12 month rule needs a listing in India. Long term gains bear 12.5 percent under section 197. Short term gains are taxed at slab rates.

Serial 4 of the table in section 73(1) sets the cost. For shares taxed under section 17(1)(d), it is the "fair market value taken into account" for that clause. So the same rise is never taxed twice.

The holding period runs from allotment. On our reading the shares become the employee's on vesting or exercise, so the grant date does not count. Section 2(101) makes an asset short term if held for not more than 24 months. Clause (b) cuts this to twelve months for a "security listed in a recognised stock exchange in India". A NASDAQ or London listing does not qualify.

The words "not more than" decide the edge case. Shares vested on 16 Jun 2026 and sold on 16 Jun 2028 are held for exactly 24 months. That sale is short term. A sale on 17 Jun 2028 is long term.

Item	Rule for parent shares	Provision
Cost of acquisition	Rupee fair market value taken for the perquisite	Section 73(1), table serial 4
Start of the holding period	Date of allotment (our reading)	Section 2(101)
Long term threshold	More than 24 months	Section 2(101)(a)
12 month threshold	Only for securities listed in India	Section 2(101)(b)(i)
Long term rate	12.5%, no indexation	Section 197(1)
Short term rate	Slab rates	Section 196 needs securities transaction tax
INR 1,25,000 exemption	Not available	Section 198 needs securities transaction tax
Surcharge cap on capital gains	15%	Department rate tables, AY 2026-27
Rupee value of the sale price	TT buying rate on the last day of the month before transfer	Rule 206

Sections 196 and 198 (old sections 111A and 112A) need securities transaction tax, which a NASDAQ sale does not bear. The department's short term and long term gains pages set that condition. Section 197(1) carries the 12.5 percent rate.

Rule 206 converts capital gains at the TT buying rate on the last day of the month before the transfer. The cost is already in rupees, so on our reading only the sale price needs converting. Currency movement becomes part of the gain. Track each tranche as its own lot, with its allotment date and rupee cost. Pay advance tax under section 408 in the instalment after the sale.

How are dividends and foreign tax credit handled?

Dividends from the parent are taxed in India at slab rates as other income. The parent's country may withhold tax first, up to 25 percent for a small holder under the India US treaty. The employee claims credit by filing Form 44 under rule 76 of the Income Tax Rules, 2026. It is due within 12 months of the end of the tax year.

Article 10(2) of the India US treaty allows 15 percent for a company holding at least 10 percent of voting stock. It allows 25 percent "in all other cases", which covers employees. India gives relief under section 159 of the Income Tax Act, 2025.

Form 44 replaced Form 67 from 1 Apr 2026. The guidance note and the Form 44 and 45 FAQs set these points:

1. Only a resident with foreign income who wants credit for foreign tax files it.
2. It is due within 12 months from the end of the tax year in which India taxes the income.
3. Proof is a certificate or statement giving the nature of the income and the tax deducted or paid, with proof of payment or deduction.
4. Under rule 76(16), an accountant must verify the form for a company. Others need it where foreign tax for the year is INR 1,00,000 or more.
5. A new Form 45 reports the settlement of a dispute about foreign tax not yet credited.

We file Form 44 before the return, so processing allows the credit first time. For a claim at or above INR 1,00,000 we book the accountant's verification early.

Article 25(2)(a) of the India US treaty caps the credit. It cannot exceed the Indian tax attributable to the income the US may tax. Rule 76 sets the computation and the exchange rate for the foreign tax, so we work each claim from the rule text.

Foreign tax on the perquisite arises where the employee worked in the parent's country during vesting. Check whether that country taxes a non resident's gain before assuming a credit on a sale.

What must employees report in their return?

Report the perquisite as salary from Form 130, every sale as a capital gain, dividends as other income, and every foreign holding in Schedule FA. A resident lists parent shares even in a year with no sale. File Form 44 to claim foreign tax credit. The due date for ITR-1 and ITR-2 stays 31 July under the Budget 2026 FAQs.

Schedule FA follows the calendar year, not the tax year. The department's guide gives 1 Jan 2024 to 31 Dec 2024 as the period for AY 2025-26. On the same pattern, the return for AY 2026-27 (FY 2025-26) covers calendar year 2025. For the first return under the Income Tax Act, 2025, for tax year 2026-27, check the period printed in the form you file.

The department's step by step guide to Schedules FA, FSI and TR sets the tables:

1. Table A2 lists foreign custodial accounts, such as the broker account. It asks for the peak balance, closing balance and gross amounts credited.
2. Table A3 lists foreign equity interest, such as the shares. It asks for initial, peak and closing value, amounts credited and sale proceeds.
3. Values convert at the SBI TT buying rate on the relevant date: the peak date, the investment date or the year end.

Employees with parent shares use ITR-2. The ITR-1 FAQs for AY 2026-27 bar anyone with "any asset (including financial interest in any entity) located outside India".

We report vested shares only, because an unvested RSU gives no ownership until delivery. The schedule applies to residents. The department's guide says Schedule FA need not be filled by a taxpayer who is not ordinarily resident or non resident.

Item	Where it goes	Source document	Timing
Perquisite on allotment	Salary schedule	Forms 130 and 123	Return for the year of allotment
Shares sold to cover tax	Capital gains, short term, close to nil	Broker statement	Same return
Sale of retained shares	Capital gains schedule	Broker statement; Form 130 for cost	Return for the year of sale
Dividends	Other sources; Schedules FSI and TR	Broker tax statement	Return for the year received
Foreign tax credit	Form 44 under rule 76	Withholding statement	Within 12 months of the year end
Parent shares held	Schedule FA, Table A3	Broker statements	Calendar year to 31 December
Broker account	Schedule FA, Table A2	Broker statements	Calendar year to 31 December
TCS on an exercise remittance	Tax credit	Form 133 from the bank	Return for the year of remittance

When Schedule FA was missed

Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 sets the penalty. It is INR 10 lakh for leaving a foreign asset out of the return. A proviso in force from 1 Oct 2024 removes it where assets other than immovable property total INR 20 lakh or less. The Finance Act, 2026 sets the same INR 20 lakh floor for prosecution under the Black Money Act, with effect from 1 Oct 2024.

Two routes fix an omission. A revised return now has twelve months from the end of the tax year. After nine months it costs INR 5,000 where income exceeds INR 5 lakh. For FY 2025-26 the window runs to 31 Mar 2027.

The second route is the Foreign Assets of Small Taxpayers Disclosure Scheme, 2026 (FAST-DS). It sits in Chapter IV (sections 130 to 144) of the Finance Act, 2026. The CBDT's FAST-DS FAQs say it runs from 16 Aug 2026 to 31 Dec 2026.

One category covers a foreign asset already offered to tax, or bought while non resident, but left out of Schedule FA. It applies where such assets total up to INR 5 crore. Value is taken as on 31 Mar 2026, and the fee for this category is a flat INR 1 lakh. RSU shares taxed as a perquisite fit this category. The Budget 2026 FAQs name ESOP and RSU holders as an example. A valid declaration gives immunity from further tax, penalty and prosecution under the Black Money Act.

Our income tax return service files Schedule FA, Form 44 and FAST-DS declarations for employees.

What changed in 2026

Topic	Old position	New position	Date	Instrument
Charging clause	Section 17(2)(vi), 1961 Act	Section 17(1)(d), definitions in 17(4)	1 Apr 2026	Income Tax Act, 2025 (Act 30 of 2025)
Fair market value	Rule 3(8), 1962 Rules	Rule 15(6) and 15(8)	1 Apr 2026	Income Tax Rules, 2026, G.S.R. 198(E)
Salary TDS	Section 192; deferral in 192(1C)	Section 392; deferral in 392(3)	1 Apr 2026	Income Tax Act, 2025
Payroll forms	Forms 16, 12BA and 24Q	Forms 130, 123 and 138	Tax year 2026-27	Rules 215, 204 and 219
Cost, holding period and rate	Sections 49(2AA), 2(42A) and 112	Sections 73(1), 2(101) and 197	1 Apr 2026	Income Tax Act, 2025
Foreign tax credit	Rule 128, Form 67	Rule 76, Form 44 with accountant check at INR 1,00,000; new Form 45	1 Apr 2026	Income Tax Rules, 2026
TCS on LRS	Section 206C(1G)	Section 394	1 Apr 2026	Income Tax Act, 2025
Black Money Act floor	INR 20 lakh floor for the section 43 penalty	Same floor for prosecution under the Black Money Act	From 1 Oct 2024	Finance Act, 2026
Revised return	Nine months	Twelve months, fee after nine	FY 2025-26 onward	Finance Act, 2026
Unreported foreign assets	No open scheme	FAST-DS, flat INR 1 lakh fee for assets already taxed	16 Aug to 31 Dec 2026	Finance Act, 2026; CBDT FAQs
ESOPs and wages	Earlier wage definitions	ESOPs are not wages	21 Nov 2025	Labour codes; Ministry FAQ 3

The perquisite charge did not change in substance. Every section, rule and form number a payroll team uses did. The changes that cost money sit on the reporting side: Form 44 and its accountant verification, FAST-DS and the Black Money Act floors.

Worked example

The facts

Asha is a software engineer in Bengaluru. She works for the Indian Private Limited subsidiary of a US parent listed on NASDAQ. She is resident and ordinarily resident and uses the new tax regime. Every figure below is an assumption for illustration.

Assumption	Value
Taxable salary for tax year 2026-27, before the RSUs	INR 30,00,000
RSUs vesting on 16 Jun 2026	400
Fair market value per share on the vest date	USD 50
Exchange rate for the perquisite (assumption)	USD 1 = INR 87
Sale date and price for the shares she keeps	20 Jun 2028 at USD 70
Exchange rate for both sales (assumption)	USD 1 = INR 87
Slab rates	Current rates, used for both years

The slab rates are the new regime rates the department publishes for AY 2026-27. Income up to INR 4,00,000 is nil. Each next INR 4,00,000 bears 5, 10, 15, 20 and 25 percent, and income above INR 24,00,000 bears 30 percent. We assume the same slabs for tax year 2026-27 and for 2028. Check the rates in force for the year before you rely on the figures. The rupee rate of INR 87 is an assumption, not an SBI TT buying rate.

The perquisite and the TDS

The perquisite is 400 shares × USD 50 = USD 20,000, or INR 17,40,000 at INR 87. Her taxable income rises to INR 47,40,000, below the INR 50 lakh surcharge line.

Step	Without the RSUs (INR)	With the RSUs (INR)
Taxable income	30,00,000	47,40,000
Tax up to INR 24,00,000	3,00,000	3,00,000
Tax at 30% above INR 24,00,000	1,80,000	7,02,000
Health and education cess at 4%	19,200	40,080
Total tax for the year	4,99,200	10,42,080
Extra tax caused by the vest		5,42,880

The extra tax is 31.2 percent of the perquisite, because all of it falls in the 30 percent slab. Payroll deposits INR 5,42,880 by 7 Jul 2026 and reports it in Form 138 for April to June, due 31 Jul 2026.

Sell to cover and the shares she keeps

INR 5,42,880 at INR 87 is USD 6,240, or 124.8 shares. The administrator sells 125 shares for USD 6,250, which is INR 5,43,750. The parent remits the cash to the Indian company. Payroll pays Asha the INR 870 surplus with her next salary.

Item	Shares	Rupee value (INR)
Shares vested and taxed	400	17,40,000
Shares sold to cover tax	125	5,43,750
Gain on those shares		Nil
Shares kept	275	11,96,250
Cost per share kept, section 73(1)		4,350

Asha reports the 125 shares as a sale with a nil gain. Her Form 130 shows the full INR 17,40,000 perquisite.

The sale in June 2028

Asha sells the 275 shares on 20 Jun 2028, more than 24 months after allotment, so the gain is long term.

Step	Amount
Sale price	275 × USD 70 = USD 19,250
Sale price at INR 87	INR 16,74,750
Less cost under section 73(1)	INR 11,96,250
Long term capital gain	INR 4,78,500
Tax at 12.5% under section 197	INR 59,812.50
Cess at 4%	INR 2,392.50
Total tax on the sale	INR 62,205

No INR 1,25,000 exemption applies, because section 198 needs securities transaction tax. If the rupee is at INR 90 on the sale, the gain rises to INR 5,36,250. The tax then rises to INR 69,712.50, because currency gain is taxed with the share gain.

What a sale four days early would cost

A sale on 16 Jun 2028 comes exactly 24 months after allotment. The gain is then short term and falls in her 30 percent slab.

Sale date	Holding	Tax on INR 4,78,500 (INR)
16 Jun 2028	Exactly 24 months, short term	1,49,292 (31.2%)
20 Jun 2028	More than 24 months, long term	62,205 (13%)
Difference		87,087

The filings that follow

The employer issues Form 130 by 15 Jun 2027 and includes Asha in Form OPI for the half year to 30 Sep 2026. Asha reports the shares and broker account in Schedule FA every year she holds them.

Common mistakes

1. Applying the 12 month rule to a NASDAQ listing. The 12 month test needs a listing in India. Fix: count 24 months from allotment.
2. Selling on the 24 month anniversary. A holding of exactly 24 months is short term. Fix: sell after the anniversary of allotment.
3. Taking a nil cost on RSU shares. The perquisite was taxed. Fix: use the rupee value in Form 130 as cost under section 73(1).
4. Claiming the INR 1,25,000 exemption. Section 198 needs securities transaction tax. Fix: tax the whole long term gain at 12.5 percent.
5. Using a 409A value for an unlisted parent. Rule 15(6)(d) needs a Category I merchant banker. Fix: get an Indian report dated within 180 days before allotment.
6. Leaving out the shares sold to cover tax. They are a sale even with a nil gain. Fix: report them in the capital gains schedule.
7. Skipping Schedule FA in a year with no sale. The schedule covers assets held at any time in the calendar year. Fix: fill Tables A2 and A3 every year.
8. No Form OPI from the employer. The Indian employer reports employees' holdings, not the parent. Fix: file within 60 days after each half year.
9. Paying a markup without GST. Circular No. 213/07/2024-GST taxes any markup, fee or commission. Fix: pay reverse charge GST on it.
10. Two exchange rates for one vest. Payroll and the return disagree. Fix: document one rate and use it in both.

Checklist for parent equity granted to Indian employees

1. List every plan the parent runs for Indian staff: options, RSUs, ESPP and SARs.
2. Confirm that each plan is offered globally on a uniform basis under Schedule III of the OI Rules, 2022.
3. Agree a monthly vest and exercise report with the plan administrator.
4. Value each allotment under rule 15(6), with a merchant banker report where needed.
5. Convert each value to rupees at one documented TT buying rate.
6. Add the perquisite to payroll in the month of allotment and recover the tax.
7. Deposit the tax by the 7th of the next month, and by 30 April for March.
8. File Form 138 each quarter and issue Forms 130 and 123 after the year.
9. File Form OPI within 60 days after each half year ending September and March.
10. Sign a recharge agreement with the parent and decide whether it carries a markup.
11. Benchmark the recharge and report it in Form 3CEB, or Form 48 from tax year 2026-27.
12. Brief employees on Schedule FA, the 24 month rule and Form 44.

For a review of a parent plan before the next vest, our ESOP and ESPS advisory team works with the payroll and FEMA teams.

Frequently Asked Questions

Is an RSU taxed at grant in India?+

No. Section 17(1)(d) of the Income Tax Act, 2025 taxes shares allotted or transferred, so nothing arises at grant. Tax arises when the shares are delivered on vesting. The perquisite is the fair market value on that date under rule 15(6). A grant made years earlier is taxed under the 2025 Act if it vests after 1 Apr 2026.

Are unvested RSUs taxed if I leave the company?+

No. Unvested units usually lapse when an employee leaves, and nothing is allotted. If the plan lets some units vest after exit, the shares are a perquisite from a former employer under section 17(1)(d). The Indian company may no longer pay you salary, so you pay the tax through advance tax or self assessment.

Is the perquisite taxed if the parent is listed only on NASDAQ?+

Yes. Listing affects only the valuation. Rule 15(6)(a) uses the average price on a recognised stock exchange, a term taken from Indian securities law. Read strictly, a foreign exchange does not qualify, so rule 15(6)(d) asks for a merchant banker value. Payroll practice uses the overseas price, and we add a merchant banker report for large vests.

Who pays the tax when shares are sold to cover it?+

The employee bears the tax and the Indian employer deposits it. The plan administrator sells enough shares to fund the TDS, and the parent remits the cash to the subsidiary. The subsidiary deposits it under section 392 by the 7th of the next month. Any surplus goes back through payroll, and the shares sold are reported as a sale.

Does the Indian employer deduct tax if the parent does not recharge the cost?+

Yes. Section 17(1)(d) covers shares allotted directly or indirectly, and section 392 binds whoever pays the salary. The recharge decides only the subsidiary's own deduction, transfer pricing and GST position. It does not change the perquisite or the duty to include it in TDS and in Forms 138, 130 and 123.

Is GST payable on an ESOP recharge to the foreign parent?+

Not on a recharge at cost. CBIC Circular No. 213/07/2024-GST of 26 Jun 2024 says reimbursing the cost of securities issued to the subsidiary's employees is not consideration for a supply. Any additional fee, markup or commission is consideration for a service. The subsidiary pays GST on that amount under reverse charge.

Does an employee need RBI approval to exercise parent options?+

No. Paragraph 3 of Schedule III to the Overseas Investment Rules, 2022 lets an employee or director of an Indian subsidiary, branch or office acquire parent shares "without limit". The scheme must be offered globally on a uniform basis. The remittance counts towards the LRS limit of USD 2,50,000, and the employer files Form OPI.

Does TCS apply when I remit money to exercise options?+

Yes, above the threshold. The bank collects TCS under section 394 of the Income Tax Act, 2025 on LRS remittances. The Budget 2026 FAQs keep the rate at 20 percent above INR 10 lakh a year for purposes other than education and medical treatment. The TCS is a credit in your return.

Can I keep the sale proceeds in my US broker account?+

Check with your bank. RBI's LRS FAQ lets an investor retain and reinvest income from investments abroad. It also says foreign exchange not reinvested must come back within 180 days. Whether that reaches proceeds of shares acquired without a remittance is not settled. The 90 day rule in regulation 9(4) of the OI Regulations covers direct investment only.

Is the INR 1,25,000 long term gain exemption available on foreign shares?+

No. Section 198 of the Income Tax Act, 2025 (old section 112A) needs securities transaction tax, which a foreign sale does not bear. The whole long term gain is taxed at 12.5 percent under section 197, without indexation. Surcharge applies where income is high enough, capped at 15 percent, plus 4 percent cess.

How is the cost of RSU shares worked out?+

The cost is the rupee fair market value taxed as the perquisite. Serial 4 of the table in section 73(1) of the Income Tax Act, 2025 fixes it. For RSUs that vested at USD 50 with the rupee at INR 87, the cost is INR 4,350 a share. Shares sold to cover tax at the vest price give a gain close to nil.

Do I need Form 44 if the US withholds tax on my dividends?+

Yes, to get credit. Form 44 under rule 76 of the Income Tax Rules, 2026 replaced Form 67 from 1 Apr 2026. File it within 12 months from the end of the tax year in which India taxes the dividend. An accountant must verify it if foreign tax for the year reaches INR 1,00,000.

What if I left my RSUs out of Schedule FA?+

Fix it now. For FY 2025-26 a revised return is possible until 31 Mar 2027, with a fee after nine months. FAST-DS runs until 31 Dec 2026 and charges a flat INR 1 lakh for assets already offered to tax, up to INR 5 crore in total. Section 43 of the Black Money Act carries an INR 10 lakh penalty where the assets exceed INR 20 lakh.

Are RSUs that vested before 1 Apr 2026 taxed under the new Act when sold?+

A sale after 1 Apr 2026 is taxed under the Income Tax Act, 2025, using section 197 and the 24 month rule in section 2(101). Serial 4 of the section 73(1) table refers only to section 17(1)(d) of the 2025 Act, not to old section 17(2)(vi). Section 536 keeps actions under the 1961 Act alive where consistent with the new Act. On our reading the value taxed under old section 17(2)(vi) remains the cost. Keep the old Form 16 and Form 12BA as proof.

How are RSUs taxed if I moved to India during vesting?+

If you are resident and ordinarily resident when the RSUs vest, India taxes the whole perquisite. Article 16 of the India US treaty (dependent personal services) decides which country may tax pay for work done there. We apportion the award by working days in each country. Where the other country taxes its share, claim credit for that tax through Form 44.

Is an ESPP discount taxable in India?+

Yes. Shares bought under an employee stock purchase plan are specified securities under section 17(4)(f). The perquisite is the fair market value on the purchase date less the price paid from payroll savings. The employer deducts TDS under section 392 in that month. The shares then follow the capital gains rules on this page.

Sources

• Income Tax Department, Section 17 (Perquisite), Income Tax Act, 2025, https://www.incometaxindia.gov.in/w/section-17-225
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• Central Board of Direct Taxes, Income Tax Rules, 2026, G.S.R. 198(E), 20 Mar 2026, https://www.incometaxindia.gov.in/documents/d/guest/en-notified-it-rules-2026-20-03-2026-pdf
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