Foreign Tax Credit Under Employee Stock Option Scheme

Employee Stock Option Scheme (ESOS) means a scheme where a company grants its employees an option to subscribe to the shares of the company. 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. 

ESOS is a tool for the company through which the company retains/attracts good talent towards the company. By way of ESOS 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

The taxability of ESOS arises in two stages of its issue, which are –

• Stage I: When the equity shares are allotted to the employees after he/she has exercised his option under ESOS – It will be taxed as a ‘perquisite’ under the salary income under the Income Tax Act, 1961. The difference between the exercise price and the Fair Market Value (FMV) of the share 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 be reflected in Form 16 of the employee under an annexure Form 12BA.
• Stage II – When the employee sells the shares allotted under ESOS – It will be taxed as capital gains on the difference between the sale proceeds and the FMV of the shares at the time of exercise of the option.

ESOS by Foreign Company and Documents Required to Claim Foreign Tax Credit Under ESOS

ESOS issued by Foreign Company

Sometimes, the ESOS are also issued by foreign employers, such as MNCs, to Indian individuals who play a pivotal role in the growth of the companies; in that case, the taxability may also arise in the country in which the foreign employer operates. Hence, perquisites on the exercise of ESOS and capital gains on the sale of such shares may also arise in the foreign jurisdiction and may also be taxable in such foreign jurisdiction if a person is holding equity shares in a foreign company. 

Further, the global income of the resident individuals will be taxable in India, and hence, perquisite/capital, the said perquisite/capital gains arising in foreign jurisdiction will also be taxable in India. Will it be a double taxation? Y,es it can be….. However, the benefit is available to such persons in the form of DTAA (Double Tax Avoidance Treaties) entered between the Indian Government and such foreign jurisdiction, if any. Whereby the tax paid by the person on amount/capitalthe perquisite amount / capital gains amount in a foreign jurisdiction will be creditable against the tax payable by person on the said income in India.

Documents Required to Claim Foreign Tax Credit

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 to claim 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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