A US parent can grant options or restricted stock units to employees of its Indian subsidiary under its own plan. FEMA overseas investment rules and reporting apply, tax arises as salary on exercise or vesting with Withholding Tax, and again as capital gains on sale. Any recharge of the cost to the Indian company needs an agreement and transfer pricing support. The Indian company can also issue its own ESOPs under the Companies Act.
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Key facts
| Route 1 | Employees receive options or RSUs of the US parent under its plan |
|---|---|
| Route 2 | The Indian company issues its own ESOPs under the Companies Act |
| Employee tax, first event | For an ESOP, fair market value on the exercise date less the exercise price is taxed as salary at exercise (for RSUs, at vesting), and the Indian employer withholds tax |
| Employee tax, second event | On sale of the shares, capital gains tax applies; the long-term rate is 12.5% for shares held more than 24 months |
| Foreign assets | Employees must disclose foreign shares in Schedule FA of their Indian return and can claim foreign tax credit through Form 67 |
| Cost recharge | The parent often recharges the cost to the subsidiary; it needs an agreement and transfer pricing support |
| Companies Act conditions | A special resolution of shareholders (filed in Form MGT-14 within 30 days) and a minimum of one year between grant and vesting |
Two ways to give equity to Indian employees
| Parent's plan | Indian company's own ESOP | |
|---|---|---|
| Shares issued | US parent shares | Indian subsidiary shares |
| Main law | Overseas Investment Rules, 2022 (parent shares are treated as overseas portfolio investment) and the parent's plan | Section 62(1)(b) of the Companies Act, 2013 with Rule 12, and FEMA where non-residents are involved |
| Valuation | Fair market value of the parent's shares on the relevant date | Valuation of the Indian company's shares |
| Typical use | Venture-backed and listed US groups | Indian-owned companies or where local equity is wanted |
How a parent-plan ESOP works for an Indian employee
- The parent grants options or RSUs and adds an India addendum to the plan.
- The award vests over the agreed period.
- On exercise or vesting, the benefit is valued and taxed as salary, and the employer withholds the tax.
- The employee holds or sells the shares, with capital gains tax on sale.
- The employee reports the foreign shares as foreign assets in the Indian tax return, and FEMA reporting applies.
Withholding Tax on exercise
Because tax arises before the employee has cash from a sale, the employer must collect the tax at exercise or vesting. Plans usually solve this with a sell-to-cover arrangement, a payment by the employee or a payroll deduction. Agree the mechanism in advance.
Cost recharge and transfer pricing
Where the Indian company bears the cost of the parent's equity awards, the recharge should be covered by a written agreement. Whether the cost is deductible, whether Withholding Tax applies and whether it is at arm's length are frequently disputed, so document the arrangement and benchmark it. See transfer pricing.
The Indian company's own ESOP
- The company adopts a scheme by special resolution that sets out eligibility, vesting and exercise.
- A valuation supports the exercise price and the tax computation.
- FEMA conditions apply if employees or shareholders are non-residents.
- Reporting to the Registrar and the RBI follows the issue of shares.
What this means for a US parent
- Your US counsel should confirm the securities-law exemptions for offering equity to employees in India and any plan amendments.
- Add an India addendum to the plan that covers tax withholding, FEMA reporting and local law.
- Coordinate the share valuation with your US 409A or equivalent valuation. See share valuation.
Mistakes to avoid
- Not Withholding Tax at exercise or vesting.
- Using the US plan unchanged, with no India addendum.
- Overlooking FEMA reporting and employees' foreign asset disclosures.
- Recharging costs to the subsidiary without an agreement.
- Granting equity without a valuation.
How AU Corporate handles this
We cover the valuation, FEMA, tax and legal work for ESOPs in India.
Related services: Transaction advisory and valuation · Taxation and regulatory
Official sources
Rules on this page can be verified at the primary sources: Ministry of Corporate Affairs, Reserve Bank of India, Income Tax Department and the GST portal.
Frequently asked questions
Can Indian employees receive US parent shares?
Indian employees can receive US parent shares under the parent's plan, subject to FEMA overseas investment rules and reporting. The tax and withholding treatment needs to be set up in advance.
When are ESOPs taxed in India?
Twice. The benefit is taxed as salary at exercise or vesting, and capital gains tax applies when the shares are sold.
Does the subsidiary pay for the parent's ESOP cost?
An Indian subsidiary often pays for the parent's ESOP cost through a cost recharge under an agreement. Deductibility and Withholding Tax on the recharge are frequently disputed, so it should be documented from the start.
Can the Indian company issue its own ESOPs?
Yes, under the Companies Act with a special resolution and a scheme. A valuation is needed and FEMA conditions apply where non-residents are involved.
How do ESOPs for Indian employees of a US parent work?
The US parent grants options or restricted stock units to employees of the Indian subsidiary under its plan. FEMA overseas investment rules and reporting apply to the employees, and tax arises on exercise or vesting as salary, with Withholding Tax, and again as capital gains on sale.
Does the subsidiary reimburse the parent for ESOP costs?
An Indian subsidiary often reimburses the parent for ESOP costs through a cost recharge under an agreement. Deductibility, transfer pricing and Withholding Tax on these recharges are frequently disputed, so the arrangement should be documented carefully from the start.
Is an LLP cheaper than a private limited company?
Compliance for an LLP can be lighter, but eligibility for foreign investment, funding options and US tax treatment usually matter more for a US parent than compliance cost.
How is an ESOP taxed for employees in India?
An Indian employee is taxed on ESOP shares twice: as salary on the fair market value at exercise less the exercise price (for RSUs, at vesting), with tax withheld by the employer, and as capital gains on sale, where the long-term rate is 12.5% for shares held more than 24 months. Employees must disclose foreign shares in Schedule FA and can claim foreign tax credit using Form 67.
What are the Companies Act conditions for ESOPs in India?
An Indian company issues ESOPs under Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, which require a special resolution of shareholders (filed in Form MGT-14 within 30 days) and a minimum of one year between grant and vesting.
Related guides
Share Valuation for Foreign Investment: Pricing Rules and Certificates
Why shares issued to a US parent need a valuation, who can certify it, the pricing floor under FEMA, and when you need a fresh valuation.
Read the guide →Hiring and Payroll in India for US Companies: Contracts, PF, ESI and Gratuity
How US companies hire in India: employment contracts, provident fund, ESI, gratuity, professional tax, payroll steps and India's labour codes.
Read the guide →Transfer Pricing in India: A Guide for US Parents and Their Indian Subsidiaries
How transfer pricing works for an Indian subsidiary of a US company: arm's length pricing, documentation, Form 48, methods, safe harbour and audits.
Read the guide →Repatriating Profits to the US: Dividends, Fees, Royalties, Loans and the Paperwork
How a US parent receives money from its Indian subsidiary: dividends, service fees, royalties, loans. Forms 145 and 146, Withholding Tax and DTAA relief.
Read the guide →Sources
Last updated 14 October 2026. General information only, not legal or tax advice. Indian rules change often; confirm current requirements before acting.