ESOPs to your Indian team from a foreign parent: What FEMA and the Income-tax Act actually require

Which law applies: for tax year 2026-27 onwards (from 1 April 2026), this guide cites the Income-tax Act 2025 and the Income-tax Rules 2026. The Income-tax Act 1961 equivalents, shown in brackets, govern FY 2025-26 (AY 2026-27) and earlier.

The moment a foreign company hires its fifth engineer in Bengaluru, someone in the HR channel asks whether the India team can be put on the same global option pool as everyone else. The answer is yes — and almost every company gets there without incident. What they get wrong is everything that happens afterwards: a half-yearly RBI filing nobody knew existed, a payroll withholding obligation that lands on the Indian entity rather than the parent, and a foreign-asset disclosure in each employee's tax return that carries penalties out of all proportion to the size of the grant.

This is the compliance layer that sits quietly under a routine benefits decision. Here is what it actually looks like.

What the regulation actually says

The first thing to fix is a common misclassification. When a foreign parent grants its own shares to an employee sitting in India, that is not foreign direct investment into India. No money is coming in; an Indian resident is acquiring a foreign asset. The transaction is governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022 and the corresponding Overseas Investment Regulations, 2022, not by the Non-Debt Instruments Rules that govern inbound FDI.

Under Rule 15 of the OI Rules, 2022, a resident individual acquiring equity capital of a foreign entity under an employee stock option scheme is making Overseas Portfolio Investment (OPI) where the holding is below ten per cent of the paid-up capital and does not carry control. Two features of this route matter commercially:

It is an automatic-route transaction. No prior RBI or government approval is required, provided the scheme is offered by the foreign entity globally on a uniform basis to its employees and directors, including those of its Indian office, branch or subsidiary. "Uniform basis" is the operative condition — a plan carved out only for India, on materially different terms, falls outside the concession and needs to be re-examined.

The LRS interaction is narrower than most people assume. The Liberalised Remittance Scheme cap of USD 250,000 per financial year bites only when the employee actually remits money out of India to pay the exercise price. Where the grant is cashless, net-settled, or where shares vest without any outward payment, no LRS drawdown occurs. Where the employee wires funds abroad to exercise, that remittance is an LRS transaction and consumes the annual limit.

The reverse direction is worth separating cleanly, because the two get conflated. If the Indian subsidiary issues its own shares or options to non-resident employees or directors, that is FDI. It is permitted under the automatic route under Rule 8 of the NDI Rules, 2019, provided the scheme is drawn under SEBI regulations, the Companies (Share Capital and Debentures) Rules, 2014 or other applicable law, and the issue complies with the applicable sectoral cap (Rule 8, provisos (a) and (b)). It needs prior government approval where foreign investment in the company's sector is under the approval route, or where the options go to a citizen of Bangladesh or Pakistan (Rule 8, provisos (c) and (d)). Separately, the general land-border proviso in Rule 6(a)(i) sends investment by an entity or citizen of a country sharing a land border with India, or where the beneficial owner is such a citizen, to the government route. That test turns on citizenship and beneficial ownership, not residence. Issuance is reported in Form ESOP within 30 days from the date the ESOPs are issued (RBI Master Direction on Reporting under FEMA), and where options are later exercised into shares against consideration, Form FC-GPR obligations can also be triggered.

Filing obligation on the Indian entity. This is the one that is missed most often. Under Regulation 10(3) of the OI Regulations, 2022 and its proviso, the Indian office, branch or subsidiary of the foreign granting entity — not the individual employee — must report the OPI in Form OPI to its authorised dealer (AD) bank within 60 days from the end of the half-year, that is, by end-November for the half-year ending 30 September and by end-May for the half-year ending 31 March. The reporting is done on the RBI's OID/FIRMS reporting infrastructure through the AD bank.

Repatriation on exit. When the employee sells the foreign shares, check the FEMA realisation and repatriation requirements for the sale proceeds. The 90-day repatriation rule in Regulation 9(4) of the OI Regulations, 2022 is written for ODI, not for an individual's portfolio holding. Confirm the timeline that applies with your AD bank, and do not assume proceeds can sit in an overseas brokerage account indefinitely.

Tax at exercise, not at grant. Under Section 17(1)(d) of the Income-tax Act, 2025 (Section 17(2)(vi) of the 1961 Act for earlier years), the taxable perquisite arises on the date of exercise, not grant and not vesting. Under clause (h) of the explanation to Section 17, the amount is the fair market value of the share on the exercise date less the price actually paid by, or recovered from, the employee. Because the shares are of a foreign company and are not listed on a recognised stock exchange in India, FMV is determined under Rule 15(6)(d) of the Income-tax Rules, 2026 (formerly Rule 3(8) of the Income-tax Rules, 1962) by a SEBI-registered Category I merchant banker on the "specified date". Under Rule 15(8)(l), that is the exercise date or a date not more than 180 days earlier. The withholding obligation under Section 392 (formerly Section 192) falls on the Indian employer, because the perquisite is treated as salary paid by the Indian entity on behalf of the group.

Tax again at sale. Disposal produces capital gains. For Indian tax purposes, shares of a foreign company are treated as unlisted securities: the holding period threshold is 24 months, above which gains are long-term and taxed at 12.5 per cent without indexation following the Finance (No. 2) Act, 2024. Below 24 months, gains are short-term and taxed at the individual's slab rate. Any foreign tax paid may be creditable under the relevant Double Taxation Avoidance Agreement, subject to furnishing the statement in Form No. 44 under Rule 76(10) of the Income-tax Rules, 2026 (formerly Form 67).

Practical implications: what goes wrong

The half-yearly Form OPI is never filed. In most groups, equity administration sits with the parent's finance team and payroll sits with the Indian entity, and the RBI filing belongs to neither by default. Contraventions under FEMA are curable through compounding under Section 15, but compounding requires an application, a fee, and a disclosed history of non-compliance — which then surfaces in every subsequent due diligence exercise. Buyers price this in.

Withholding is missed on exercise. Because no cash moves through Indian payroll when options are exercised abroad, the perquisite frequently escapes the payroll system entirely. The Indian entity remains liable for the shortfall along with interest under Section 398(3) of the Income-tax Act, 2025 (Section 201(1A) of the 1961 Act for earlier years), and disallowances follow. The practical fix is to treat exercise events as a payroll input feed, not as an equity-administration output.

Schedule FA is left blank. Every resident holding foreign shares must disclose them in Schedule FA of the income tax return, irrespective of whether any income arose. Non-disclosure sits under the Black Money (Undisclosed Foreign Income and Assets) Act, 2015, which carries a penalty of ₹10 lakh — although, following a 2024 amendment, that penalty is not levied where the aggregate value of the undisclosed foreign assets (other than immovable property) does not exceed ₹20 lakh. Employees rarely know this obligation exists. Telling them is cheap; the alternative is not.

No cross-charge, no deduction. Where the parent bears the ESOP cost and never recharges the Indian subsidiary, the subsidiary generally cannot claim the discount as a deduction. Where it is recharged, Indian courts — most prominently the Karnataka High Court in the Biocon line of reasoning — have accepted ESOP cost as allowable business expenditure. The recharge is a current account transaction and remittable, but it is also a related-party transaction and must be supported by transfer pricing documentation and reported in the accountant's report in Form No. 48 under Section 172 (Rule 85 of the Income-tax Rules, 2026; formerly Form 3CEB).

Step-by-step: what to do

• Confirm the scheme is globally uniform. Review the plan document to verify that Indian participants are offered options on the same basis as employees elsewhere. If India-only terms exist, take a documented FEMA view before the first grant.
• Appoint the AD bank as the reporting channel. Notify your existing AD bank that the Indian entity will file Form OPI on behalf of resident participants, and confirm their internal documentation checklist in advance of the first half-year.
• Build a grant and exercise register. Maintain, per employee: grant date, vesting schedule, exercise date, exercise price, shares acquired, and whether exercise was cash or cashless. This register is the single source for both the FEMA filing and payroll withholding.
• Calendar the Form OPI filing. Two dates a year — end-November and end-May — covering the half-years ended 30 September and 31 March respectively.
• Commission a merchant banker valuation before each exercise window. Rule 15(6)(d) read with Rule 15(8)(l) of the Income-tax Rules, 2026 permits a valuation dated up to 180 days before exercise, so one valuation can serve a defined window if exercises are batched.
• Feed the perquisite into Indian payroll in the month of exercise and withhold under Section 392 of the Income-tax Act, 2025. Issue the salary TDS certificate in Form No. 130 (formerly Form 16) reflecting the perquisite.
• Put the cross-charge agreement in writing before the first recharge, price it on a defensible transfer pricing basis, and capture it in Form No. 48 under Section 172.
• Brief employees on Schedule FA and the repatriation requirements for sale proceeds at grant, in writing. Repeat it at exercise.
• Where the Indian entity issues its own options to non-residents, first check the approval triggers in Rule 8 of the NDI Rules and the land-border proviso in Rule 6(a)(i), then file Form ESOP within 30 days from the date the ESOPs are issued.

FAQ

Does an ESOP grant from a foreign parent use up an employee's USD 250,000 LRS limit?
Only to the extent money is actually remitted out of India to pay the exercise price. Cashless or net-settled exercises involve no outward remittance and therefore no LRS drawdown.

Who files the RBI return — the employee or the company?
The Indian office, branch or subsidiary of the foreign granting entity files Form OPI through its AD bank, within 60 days of each half-year end. It is not an individual filing.

Is tax payable when options vest?
No. The perquisite crystallises on exercise under Section 17(1)(d) of the Income-tax Act, 2025 (Section 17(2)(vi) of the 1961 Act for earlier years), based on the merchant-banker-determined FMV on that date less the price paid. Vesting alone is not a taxable event.

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See Also

• "We'll just use an EOR until we incorporate": What FEMA and Indian tax law actually require before you hire in India
• "We only have a small team in India, so there's no tax exposure": What the PE rules actually require
• "Our Indian subsidiary can just fund the Singapore entity": What the OI Rules 2022 actually require