Foreign Tax Credit Under Employee Stock Option Scheme

Updated on: Mar 26, 2021 - 04:02:09 PM

08 min read

Employee Stock Option Scheme (ESOS) means a scheme where a company grants its employees stock options. Employees stock option means the option given to the whole-time directors, employees or officers of the company where they have a right or benefit to subscribe or purchase shares on a future date at a predetermined price. The company can increase its share capital through ESOS.

A company can issue ESOS to its employees, directors or officers after receiving approval from its shareholders through a special resolution passed in the extraordinary general meeting. ESOS is a tool for the company through which the employees get a sense of ownership in the company. A company issues ESOS as a reward to the employees who have brought growth to the company.

Taxability Of ESOS

ESOS is an option given to its employees, directors, or officers to purchase the company shares at the predetermined price on a future date. The taxability of ESOS can be calculated at two stages of its issue, which are –

Stage I – When the ESOS are allotted to the employees after he/she has exercised his option upon completion of the vesting period – It will be taxed as a ‘perquisite’ under the Income Tax Act, 1961. The difference of the exercise price and the Fair Market Value (FMV) on the date of exercise of the option will be construed as a perquisite u/s 17(2)(vi) of the Income Tax Act, 1961. It will reflect in Form 16 of the employee under an annexure Form 12BA.
Stage II – When the employee opts to sell the allotted ESOS – When an employee decides to sell the shares, it will be taxed under capital gains which is the difference between the sale proceeds and the FMV of the shares at the time of exercise of the option.

Documents Required To Claim Foreign Tax Credit Under ESOS

The employee can claim the tax credit on the tax he/she has paid in the foreign country and is also paying in India through holding of foreign company stocks and generating income either in the form of a perquisite or capital gains. Rule 128 of the Income Tax Rules, 1962 provides the documents that are to be submitted for claiming the foreign tax credit. The following documents must be furnished for claiming the benefit of the foreign tax credit –

A statement of foreign income offered concerning tax for the previous year and the foreign tax paid or deducted on such income in Form No.67 and
A statement or certificate specifying the nature of income and the amount of tax deducted or paid-
- From the person responsible for deduction of such tax, or
- From the tax authority of the foreign country, or
- Signed by the taxpayer accompanied –
  - By an acknowledgement of online payment or bank counterfoil or a challan of the payment of tax when it is made by the assessee or
  - Proof of deduction when the tax has been deducted.

Points to Note-

To claim the benefit of the foreign tax credit in the Income Tax Returns, the assessee needs to file the documents mentioned above on or before the due date of filing of income tax return specified under section 139(1) of the Income Tax Act, 1961.
The foreign tax credit is not available against the payment of any interest, fee or penalty levied under the Income Tax Act, 1961.

Hence, if an employee has paid the tax on ESOS in a foreign country and simultaneously is also paying the same in India, then he/she should immediately file Form No.67 and claim the credit for the same in the Income Tax Returns.

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