Employee Stock Purchase Plans vs ESOPs: Structuring for Indian Subsidiaries

Foreign companies building engineering or technology teams in India almost always arrive at the equity compensation question within the first year. The answer seems obvious until the FEMA implications surface. A foreign parent granting stock options to Indian employees looks operationally simple. The employee gets vested options, exercises them, holds shares in the foreign parent, and eventually sells. What sits underneath that lifecycle is an intersection of FEMA’s Overseas Investment Rules and regulations 2022, two separate income tax trigger points, the GST implications of reimbursement or cross-charge of ESOP costs between the foreign parent and the Indian subsidiary, an area substantially clarified by CBIC in June 2024 , and from April 2026, a new Income Tax Act 2025 with changed section references throughout.

The choice between an Employee Stock Option Plan (ESOP) and an Employee Stock Purchase Plan (ESPP) is not just a product design decision. For ESOP structuring for Indian subsidiary operations, each structure carries different tax timing, different FEMA compliance and reporting obligations, and different implications for the Indian entity’s reimbursement arrangement with the foreign parent.

What Is the FEMA Framework for Foreign Equity Grants to Indian Employees?

Under the Overseas Investment Rules 2022, effective August 22, 2022, foreign equity received by Indian resident employees through ESOP or ESPP arrangements is classified as Overseas Portfolio Investment. This replaced the earlier treatment under the Liberalised Remittance Scheme. The Indian subsidiary is responsible for semi-annual OPI reporting through Form OPI filed via its Authorised Dealer bank. OPI classification applies where the employee’s holding is below 10% of the foreign company’s equity and does not confer control.

The OI Rules 2022 introduced a clearer framework for foreign ESOPs granted to Indian employees. Before August 2022, employee stock acquisitions were primarily governed under the erstwhile FEMA regulations, with outward remittances made under LRS where applicable , but the reporting requirements were not as clearly set out. The OI Rules created a definitive path: foreign equity received through employment is OPI, reported semi-annually, not individually reported through LRS for each exercise.

Where an employee remits funds from India to pay an exercise price on foreign shares, that outward payment routes through LRS, which is capped at USD 250,000 per individual per financial year. Cashless exercise structures, where the broker sells enough shares to cover the exercise price without any outward remittance from India, remain subject to the OPI framework even though no LRS is utilised. The FEMA obligation does not disappear because the cash movement is handled offshore.

The Indian subsidiary’s obligation in all of this is not limited to the reimbursement arrangement. The subsidiary must file semi-annual OPI returns for all employees who received and hold foreign equity through ESOP or ESPP grants. Missed OPI filings are FEMA contraventions that accumulate across every reporting period.

What Is the Difference Between ESOP and ESPP Structuring for Indian Subsidiary Operations?

In ESPP vs ESOP India structuring, ESOPs give employees the right to purchase shares at a predetermined exercise price after a vesting period, with no obligation to exercise. ESPPs allow employees to purchase shares at a discount to market price through periodic payroll deductions, usually with an offering period of six to twenty-four months. The tax treatment and plan mechanics differ, while the FEMA compliance framework is broadly similar, subject to the applicable conditions under the OI Rules and Regulations, but both generally give rise to a taxable perquisite when the shares are acquired or allotted to the employee, followed by capital gains tax on their subsequent transfer and a capital gains obligation at the point of sale.

The practical difference for a foreign company deciding on ESOP structuring for Indian subsidiary employees:

ESOPs:

• Grant date: no tax, no FEMA filing
• Vesting: no tax, no FEMA filing
• Exercise: Perquisite tax generally arises on the difference between the FMV on the date of exercise/allotment and the exercise price , taxed as salary at applicable slab rate, TDS obligation on the Indian employer
• Sale: capital gains tax on the difference between sale price and FMV at exercise

ESPPs:

• Enrolment: no tax, no FEMA filing
• Purchase date (when shares are acquired at discount): Perquisite tax generally arises on the difference between the FMV on the date of allotment/acquisition and the discounted purchase price , taxed as salary at slab, TDS obligation on the Indian employer
• Sale: capital gains tax on the difference between sale price and FMV at purchase date

The key difference in ESPP vs ESOP in Indian taxation is when the perquisite crystallises. For ESOPs, the employee controls the timing of exercise and therefore the timing of the perquisite tax. For ESPPs, the purchase occurs automatically on the scheduled purchase date at the end of the offering period, unless the employee withdraws or the plan provides otherwise , and the tax arises without the employee making an active decision. For Indian employees in high tax brackets, this timing difference has a material impact on personal tax planning.

How Is the Perquisite Tax Calculated and Who Is Responsible for TDS?

Employee stock options for foreign subsidiary in India arrangements create a perquisite tax obligation at exercise or purchase. When employees exercise ESOPs or acquire shares under an ESPP, the Indian subsidiary is generally required to deduct TDS on the resulting perquisite under Section 192 of the Income Tax Act, 1961 (Section 392 under the Income Tax Act, 2025, effective April 1, 2026). The perquisite equals the fair market value of the shares less the exercise or purchase price paid by the employee.

The Indian employer’s TDS obligation is non-negotiable regardless of where the shares come from. A foreign parent granting options to Indian subsidiary employees does not shift the TDS obligation to the foreign parent. The Indian entity is the employer for income tax purposes and must deduct TDS on the perquisite when shares are delivered to the employee.

For listed shares, FMV is determined in accordance with the prescribed valuation rules under the Income-tax Rules. . For unlisted shares, FMV is generally required to be determined by a Category I Merchant Banker registered with SEBI in accordance with the prescribed valuation rules. For ESOP structuring for Indian subsidiary employees, the practical workflow at exercise:

• Employee exercises options, shares are allotted or transferred 
• Indian subsidiary receives notification from the foreign parent’s equity platform
• Indian subsidiary calculates the perquisite value: FMV at exercise minus exercise price
• TDS is computed based on the employee’s estimated tax liability for the financial year in accordance with the salary withholding provisions TDS is deposited by the 7th of the following month (or by 30th April for tax deducted in March)
• The perquisite value is included in Form 16 and the employee’s Form 26AS

If the foreign parent withholds tax under its own home country rules, such as a US employer withholding federal tax on a sell-to-cover exercise, the Indian employee can claim relief under the relevant Double Taxation Avoidance Agreement to avoid double taxation on the same income.

What Changed Under the Income Tax Act 2025 for ESOP Structuring?

The Income Tax Act 2025, effective April 1, 2026, introduces two changes material to ESOP structuring for Indian subsidiary operations: the perquisite tax deferral window for qualifying startup employees is extended from 48 months to 60 months, and section references throughout change from the 1961 Act numbering. The substantive tax treatment, rates, and TDS mechanics remain broadly unchanged under the 2025 Act as under the 1961 Act.

The deferral window change is significant for DPIIT-recognised startups specifically. The Income Tax Act, 2025 extends the ESOP perquisite tax deferral for eligible startup employees from 48 months to 60 months from the date of share allotment.

Although the tax rules remain largely the same, the section numbers change from April 1, 2026. Companies should update employment contracts, ESOP documents, board resolutions, and grant letters prepared after that date to reflect the new references. Older documents can continue to cite the Income Tax Act, 1961 that applied when they were issued.

What Is the GST Position on Reimbursement of ESOP Costs by Indian Subsidiaries?

CBIC Circular 213/07/2024-GST, issued on June 26, 2024, confirms that cost-to-cost ESOP reimbursements by an Indian subsidiary to its foreign parent are not subject to GST. Where the foreign parent charges a markup or provides a separate taxable service to the Indian subsidiary, the transaction may qualify as an import of services and may attract GST under the reverse charge mechanism, subject to the facts of the arrangement. Before June 2024, the GST position on ESOP cost recharges was contested. GST authorities had argued that when a foreign parent granted options to Indian subsidiary employees and the subsidiary reimbursed the parent for the cost, the reimbursement was an import of services attracting 18% GST under reverse charge. This position created a double liability: perquisite tax at exercise for the employee, and GST on the reimbursement for the Indian entity.

The CBIC circular resolves this for pure cost-to-cost arrangements. The circular explicitly states that if the Indian subsidiary reimburses the foreign parent solely on a cost basis without any service element or markup, the transaction is not treated as consideration for a taxable supply . Accordingly, GST would generally not arise, provided the conditions specified in the circular are satisfied ..

For ESOP structuring for Indian subsidiary operations, the practical implication is that the reimbursement agreement between the Indian subsidiary and the foreign parent must be structured and documented as a cost-sharing arrangement rather than a service agreement. Where the arrangement includes an administrative fee, markup, or other service element, the transaction may fall outside the scope of the circular and could attract GST under the applicable provisions, depending on the facts.

What Are the Capital Gains Tax Rules When Indian Employees Sell Foreign Shares?

When an Indian employee sells foreign shares received through employee stock options from a foreign subsidiary’s parent, capital gains tax applies on the difference between the sale price and the FMV at the exercise or purchase date. For unlisted shares, the holding period for long-term capital gains is 24 months. The Finance (No. 2) Act, 2024 substantially revised the capital gains regime, including changes to indexation benefits for several asset classes. The availability of indexation depends on the nature of the asset and the applicable transitional provisions. . Long-term capital gains on foreign listed shares attract 12.5% after the Finance Act 2024 changes.

The holding period calculation starts from the date shares are delivered to the employee at exercise, not from the grant date or the vesting date. A common error in individual tax filings by employees who exercised options three years before selling is computing the holding period from the grant date. It runs from exercise.

The LTCG holding period for unlisted foreign shares is 24 months, not the 12 months applicable to listed Indian equities. This distinction matters for employees at growth-stage foreign companies whose shares are not yet listed. A salewithin 24 months of exercise is a short-term capital gain taxed at the employee’s applicable slab rate. After 24 months, LTCG rates apply.

For ESPP vs ESOP India purposes, the capital gains calculation is the same at the back end regardless of which instrument was used. The only difference is the FMV reference point: exercise date for ESOPs, purchase date for ESPPs.

What Are the Indian Subsidiary’s Corporate Compliance Obligations for ESOP Plans?

ESOP structuring for Indian subsidiary operations under the Companies Act 2013 requires board resolution approving participation in the foreign parent’s plan, special resolution approval if the Indian entity is also granting its own options under Section 62(1)(b), and from June 30, 2025, dematerialisation of any securities issued by private limited companies above the small company threshold. The Indian subsidiary must also maintain records of all grants to its employees and coordinate OPI reporting through its AD bank.

The demat mandate, effective June 30, 2025 under Rule 9B, requires that private limited companies above the small company threshold (paid-up capital above Rs. 10  crore and turnover above Rs. 100  crore) issue all securities in dematerialised form. For Indian subsidiaries that have an India-domiciled ESOP plan, this means Indian employees must hold shares in demat form. For employees holding shares in the foreign parent through a cross-border grant, the demat mandate does not directly apply since those shares are held in the foreign jurisdiction’s account.

For DPIIT-recognised startups, one meaningful relaxation on employee stock options foreign subsidiary India arrangements: under Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, DPIIT-recognised startups may grant ESOPs to promoters or promoter group members who are employees or directors for up to ten years from the date of incorporation.. A founder who is also an employee of a DPIIT-recognised Indian startup can participate in the company’s own ESOP pool during this window, such participation is generally not permitted for promoters or promoter group members in companies that do not qualify for the startup relaxation ..

Conclusion

ESOP structuring for Indian subsidiary operations involves more moving parts than most foreign companies expect when they first set up an India team and want to give those employees equity participation. The Foreign Exchange Management (Overseas Investment) Rules, 2022 and the Foreign Exchange Management (Overseas Investment) Regulations, 2022 provide a clearer regulatory framework for foreign equity grants to Indian employees. . The GST reimbursement question was settled by CBIC’s June 2024 circular. The Income Tax Act 2025 extended the startup perquisite deferral window. The dematerialisation requirements effective from 30 June 2025 have strengthened the compliance framework for securities issued by eligible private companies. What remains is the operational execution: OPI reporting by the Indian subsidiary every six months, TDS compliance on every exercise event, a reimbursement agreement structured at cost with no markup, and plan documentation that references the correct post-2026 section numbers where applicable. None of these are structurally difficult. Failure to address these requirements at the outset may result in regulatory, tax, or compliance exposure rather than retrofitted after the first cohort of employees exercises their options.

Corporate Legit Consulting LLP advises foreign companies on ESOP structuring for Indian subsidiary employees, FEMA OI Rules compliance and Form OPI filing, perquisite TDS obligations at exercise, GST-compliant reimbursement agreements between Indian subsidiaries and foreign parents, demat compliance for private company securities, and Income Tax Act 2025 transition for existing ESOP plans. Reach out before the first grant letters are issued.