NRI ESOP (Employee Stock Option Plan)

What is ESOP?

ESOP (Employee stock option plan) is a benefit plan that gives employees ownership interest in the company in the form of shares stock. It is a good incentive to retain employees in the company

How do ESOPs work for NRI?

ESOPs can also be offered to Non-Resident nationals under the Non-PIS transaction category. However, for Non-Resident Indians (NRIs) to hold or sell ESOPs, you must hold an NRI Saving Bank (SB) account, NRI trading and NRI Demat accounts. ESOPs for NRIs can be bought through capital either from NRE or NRO accounts. An NRE account is opened in India in the name of an NRI to hold assets, while an NRO account is used to manage income earned within the country. NRI ESOPs are a good way for Indians living abroad to still capitalise on your holdings despite not living in the country

Below we will be explaining stages of working of ESOPs

Granting of ESOPs - An employer grants ESOPs to its employees for buying a specified number of shares of the company at a defined price after the option period (a certain number of years).

Vesting of ESOPs - Vesting period is the period between the date shares are issued, and the date the employee is able to exercise all of the rights that attach to them. Vesting becomes a right of an employee after meeting the period or performance conditions. Vesting periods tend to be between 12 months and 3 years.

Exercise of ESOPs & Sale of Shares -  In this period employee buy the shares by paying at pre decided price. Employees can also sell the shares they have brought through ESOP and make profit on the holding.

Benefits for Employees

Below are the benefits of ESOPs to employees

Sense of Ownership – When an employee gets ESOPs it keeps them motivated as it gives them stake in employers’ growth & profit. It also gives the employees sense of ownership/responsibility as they have a stake in the organization’s growth.

Buy shares at Discounted – ESOPs gives opportunity to the employees to buy shares at a discounted rate as compared to the market rates and then selling at profit.

Shares allotted under ESOPs to NRIs come under the Non-PINS transaction category. NRIs will need NRI Saving Bank SB accounts, NRI trading and NRI demat accounts to hold or sell such shares.

Tax Implications on ESOPs

Because ESOPs for NRIs may be taxed differently in your home countries, NRIs and other foreign nationals should also be mindful of these tax considerations. To fully comprehend the tax implications of an ESOP for foreign nationals in India and the home nation, it is essential to get professional counsel.

Employee stock option plan is taxable to NRIs in India. ESOPs are taxed at 2 instances

On Exercising - When an employee exercises his ESOP option, the difference between Fair Market Value (FMV) and the exercise price is taxed as a prerequisite to the employee as per their income tax slab

On Sale of shares- When an employee sells his shares, he would be liable for capital gains tax. The long term capital gain or short term capital gain taxes depend on the period of holding.

FAQs

1) What is Employee Stock Ownership Plan?

Under Employee Stock Ownership Plan (i.e. ESOP) employers offer their employees the stock of the company at a discounted rate. Exercising ESOPs is an option and not an obligation for the employees of a company. NRI employees are offered ESOPs by their company/holding company and they can exercise them using NRE or NRO funds under the Non PIS transaction category.

2) What demat account number should ESOPs be allotted into?

As NRIs can exercise ESOPs using both NRE or NRO funds, however ESOP transactions come under Non PIS category, therefore NRIs must ensure to provide the demat account number linked to NRE NON PINS or NRO NON PINS trading accounts depending on what source of funds (NRE/NRO) was used for exercising the ESOPs. NRIs should ensure the right demat account number is provided to company for ESOPs to be allotted into.

3) What are the documents required to be provided by NRI customer before sale of ESOP?

Upon sale of ESOPs by NRIs, an obligation for tax deduction i.e. TDS on capital gain arises. In order to comply with this, broker need to procure certain documents from NRIs to calculate the Cost of Acquisition (COA), know the source of funds and the holding period of ESOPs. In order to satisfy these requirements NRIs should ensure to provide the below documentary proofs -

1. ESOP allotment letter on Company Letterhead which contains details of allotment date and Exercise price
2. Details on Perquisite tax payment details if any in India or foreign country
3. If you have transferred the ESOPs from another DP in ICICI DP, then NRIs need to provide chain trail of demat transaction statement from the date of ESOPs allotted until the date of transfer of ESOPs into ICICI DP

The above proofs can be sent on email to nri@icicidirect.com

4) How TDS is calculated post receiving above required documents?

In case of Sale of ESOP shares by NRIs, if the perquisite tax is not paid in INDIA then Exercise price will be considered as cost of acquisition and accordingly tax will be deducted as per applicable rates.