Cross-Border ESOPs and Indian Tax Law: Why Apportionment Rules Are Now Urgent

Employee Stock Option Plans (ESOPs) have become a central part of compensation for Indian professionals working with multinational groups, both in India and overseas. However, while ESOPs travel seamlessly across borders, Indian tax rules have not kept pace with the reality of cross-border employment.

Where an assessee spends the entire ESOP grant-to-vesting period in India, the tax analysis is simple and well-settled. But the position becomes confusing and dispute-prone when the same ESOP benefit relates to services rendered partly in India and partly abroad. The core difficulty is that Indian law does not lay down any statutory method to split the ESOP perquisite between different countries.

In practice, this gap pushes employers to deduct tax at source (TDS) on the entire perquisite value in India, irrespective of where the underlying services were actually performed. The assessee then often suffers or manages double taxation in multiple countries, relying on foreign tax credit and treaty relief mechanisms that were never designed to operate in a vacuum of domestic allocation rules.

For years, the OECD has recommended a workday-based apportionment method for cross-border ESOP income, and jurisdictions such as the UK and Australia have already incorporated such formulas into their domestic guidance. Indian courts have, in several decisions, leaned towards a service-linked allocation philosophy. Yet there is no CBDT circular embracing this principle in a clear, mechanical way. The issue remains unresolved, and disputes keep surfacing.

Budget 2026 was widely expected to plug this gap, especially with the shift to the Income Tax Act, 2025, but that opportunity has been postponed. A simple CBDT circular—without any amendment to the statute—could dramatically reduce litigation and uncertainty for both employers and assessees.

ESOP Taxation in India: The Domestic Building Blocks

Before examining the cross-border complexity, it is important to understand how ESOPs are ordinarily taxed in a purely domestic context.

Dual Tax Incidence: Exercise and Sale

Indian income-tax legislation treats ESOPs as giving rise to taxable income at two different points in time.

  1. At the time of exercise – taxed as salary perquisite

    • Under Section 17(2)(vi) of the Income Tax Act, 1961 (now mirrored under the Income Tax Act, 2025), when an assessee exercises stock options, the difference between:
      • the Fair Market Value (FMV) of the share on the date of exercise, and
      • the exercise (or strike) price actually paid
        is treated as a perquisite under the head “Income from salary”.
    • This perquisite value is fully taxable as salary in the year of exercise.

  2. At the time of sale – taxed as capital gains

    • When those shares are later sold, the difference between:
      • the sale consideration, and
      • the FMV considered earlier for perquisite taxation
        is taxed as capital gains (short-term or long-term depending on the period of holding).

TDS Obligations on ESOP Perquisites

Just as employers must deduct TDS from regular salary, they are also required to deduct tax on ESOP-related perquisites.

  • Under Section 392 of the Income Tax Act, 2025 (corresponding to Section 192 and related provisions under the Income Tax Act, 1961), the employer must withhold tax at the time the assessee actually exercises the options and receives the shares.
  • The perquisite value computed as above is included in salary for TDS purposes.

Note
Where the employment is entirely India-based during the ESOP vesting period, this framework is relatively straightforward. The challenge arises when the vesting period overlaps with employment in multiple countries.

Cross-Border ESOPs: Where the Law Starts to Fray

As soon as the assessee performs services in more than one jurisdiction during the vesting period, it becomes necessary to determine what portion of the ESOP perquisite properly belongs to India. That is precisely where Indian law fails to provide a clear formula.

Illustration: ESOPs Earned Across Two Countries

Consider the following scenario:

  • Ms. Rao is employed with the Indian affiliate of a US-listed multinational and is granted 1,200 stock options.
  • Vesting period: 4 years. Exercise price: $10 per share.
  • She works:
    • Years 1 and 2 in India, and
    • Years 3 and 4 in the US office on assignment.
  • After returning to India, she exercises all 1,200 options when the FMV is $55 per share.

In this case:

  • Total perquisite value = (FMV $55 – exercise price $10) × 1,200 = $54,000.

From an economic and employment perspective, the benefit has accrued over 4 years of service, half in India and half in the US.