Granting Employee Stock Option Plans (ESOPs) to Non-Resident Indian (NRI) employees is permissible under Indian laws, but it comes with specific regulatory compliance under FEMA (Foreign Exchange Management Act), Income Tax Act, and SEBI guidelines. Here’s a detailed overview:

1. Legal Framework

• ESOPs to NRIs are governed by:
  • FEMA Regulations: Outlined under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
  • Income Tax Act: Tax implications on the grant, vesting, and sale of ESOPs.
  • Companies Act, 2013: Compliance for issuing ESOPs to employees.

2. Conditions for Granting ESOPs to NRIs

1. Eligibility:
   • NRIs employed by Indian companies or Indian subsidiaries of foreign companies are eligible to receive ESOPs.
2. Approval Requirements:
   • Automatic Route: ESOPs can be issued to NRIs without prior RBI approval if they comply with FEMA and sectoral caps.
   • Approval Route: For cases where issuance doesn’t align with FEMA or exceeds sectoral caps, RBI approval is required.
3. Repatriation of Proceeds:
   • Proceeds from the sale of ESOP shares can be:
     • Credited to an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account, or
     • Repatriated outside India up to the extent of the purchase consideration in foreign exchange.
4. Pricing of Shares:
   • Shares must be issued at fair market value (FMV) as per RBI/SEBI guidelines.

3. FEMA Compliance

• Shares can be issued to NRIs under ESOP schemes as long as:
  • The issuance aligns with the FEMA (Non-Debt Instrument) Rules, 2019.
  • Payment for shares is made either through:
    • Inward remittance in foreign currency, or
    • Funds lying in NRE, FCNR (B), or NRO accounts.
• The Indian company must comply with FEMA reporting, such as:
  • FC-GPR Form: For reporting the issue of shares to NRIs to the RBI.
  • Annual Return on Foreign Liabilities and Assets (FLA), if applicable.

4. Tax Implications for NRI Employees

NRIs must comply with the Income Tax Act for ESOPs at three stages:

1. At the Time of Vesting (Perquisite Tax):
   • When ESOPs vest, the difference between the Fair Market Value (FMV) of shares on the vesting date and the exercise price is treated as salary income.
   • The employer must deduct Tax Deducted at Source (TDS) under Section 192.
2. At the Time of Sale of Shares (Capital Gains Tax):
   • Short-Term Capital Gains: If shares are sold within 12 months of exercise – taxed at applicable slab rates.
   • Long-Term Capital Gains: If shares are sold after 12 months of exercise – taxed at 10% (without indexation) if gains exceed ₹1 lakh.
3. Double Taxation Avoidance Agreement (DTAA):
   • NRIs can claim credit for taxes paid in India in their country of residence under DTAA provisions.

5. Reporting Requirements

1. By Employer:
   • Employers must report ESOP transactions and ensure TDS compliance for NRIs.
   • Report share allotment to the RBI via FC-GPR.
2. By NRI Employee:
   • File an Income Tax Return (ITR) in India if income (including ESOP gains) exceeds the basic exemption limit.
   • Disclose foreign income in the resident country (if applicable).

6. Repatriation of Sale Proceeds

• Sale proceeds of ESOPs can be repatriated outside India, subject to:
  • Payment of applicable taxes.
  • Compliance with FEMA regulations.

Key Points to Remember

1. Ensure ESOP plans comply with FEMA rules.
2. Deduct TDS at the time of vesting and report gains in ITR.
3. Follow RBI reporting for share allotment and repatriation of funds.
4. Check DTAA provisions to avoid double taxation.

Would you like assistance with the tax calculations, RBI reporting forms, or DTAA clarifications related to ESOPs for NRI employees?