How NRIs Are Taxed on ESOPs and RSUs of Indian Companies and Startups: The Two-Stage Bite, the Startup Deferral, and the Home-Country Layer

You were granted options in an Indian company. Maybe it is a Bengaluru SaaS startup where you were employee number forty before you moved to London, maybe it is a listed Indian firm whose RSUs keep vesting into your demat while you sit in New Jersey, maybe it is a fintech that is now DPIIT-recognised and your vested options are worth a number that finally feels real. You exercise, and a payslip lands showing tax deducted on a gain you have not seen a rupee of, because the shares are private and there is no buyer. Then you wonder whether your country of residence is going to tax the same gain all over again.

Indian company stock is taxed differently from your US or UK employer's stock, and the differences are exactly the ones that cost money: the perquisite at exercise is Indian salary income, an NRI only pays Indian tax on the slice tied to work done in India, the DPIIT startup rules can defer the cash hit for years, and the eventual gain rides the unlisted 24-month line rather than the listed one. Get the apportionment and the deferral right and the India bill can be a fraction of what the payslip first implies.

The 30-second answer: Indian company ESOPs and RSUs are taxed in two stages. At exercise or allotment, the difference between fair market value and the exercise price is a perquisite taxed as salary under Section 17(2)(vi), with employer TDS. For an NRI, only the part relating to services rendered in India is taxable in India, apportioned by the days worked in India during the grant-to-vest period. An eligible DPIIT-recognised startup can defer that perquisite tax to within 14 days of the earliest of five years from allotment, the sale of shares, or leaving the company. At sale, the gain over FMV-at-exercise is a capital gain: unlisted shares held over 24 months are long-term at 12.5% under Section 112 without indexation, 24 months or less is short-term at slab rates, and listed STT-paid shares follow Section 112A and 111A. Your country of residence also taxes the same income, with a foreign tax credit to relieve the overlap.

This guide is about stock of an Indian company held by an NRI, which is a different animal from the US-listed RSUs your American employer hands you. For the employer-stock side, and the general RSU mechanics, start with RSU and ESOP taxation for NRIs. What follows is the Indian-company case end to end: the two stages and why they are taxed under different heads, how the India-service apportionment shrinks the perquisite for someone who has been abroad most of the vesting period, the DPIIT deferral and who actually qualifies, the unlisted-versus-listed split on the capital gain, the home-country layer and the foreign tax credit that stops you paying twice, and a single worked example carried from grant to sale to credit. One set of rupee numbers runs the whole way.

Two stages, two heads of income

The single most important thing to hold in your head is that an Indian company option is taxed twice over its life, under two different heads of income, at two different moments. People conflate them and then panic when the second bill arrives.

The first stage is exercise or allotment. When you exercise a vested option, the company allots you shares. The gap between the fair market value of the share on the date of exercise and the price you actually paid (the exercise or strike price) is treated as a perquisite under Section 17(2)(vi) of the Income-tax Act, 1961. A perquisite is salary. It is added to your employment income for the year and taxed at your applicable slab rate, and the employer is required to deduct TDS on it just as it would on your cash salary. The formula is plain:

Perquisite = (FMV on exercise date minus exercise price) times number of shares exercised.

Note what this means in a private company: the perquisite is a paper number. You now own shares, but there is no market, no buyer, and no cash. You are being taxed on a gain you cannot yet realise. That cash-flow problem is precisely what the startup deferral, covered below, exists to fix.

The second stage is sale. When you eventually sell the shares, anything you get over and above the FMV that was already taxed at exercise is a capital gain, taxed under the capital gains head, not salary. The FMV-at-exercise becomes your cost of acquisition for the gain, so you are not taxed twice on the same slice. The holding period for deciding long-term versus short-term runs from the date of exercise (allotment), not from the date of grant. This is a common and expensive misunderstanding: your years of vesting do not count toward the holding period. The clock starts the day you exercise.

So the lifecycle is: grant (no tax), vesting (no tax in India under the option route), exercise (perquisite, taxed as salary), holding (no tax), sale (capital gain). Two taxable events, salary then capital gains, and an NRI has a specific carve-out at the first one that residents do not need to think about.

The NRI carve-out: only the India-service slice is taxable

Here is where an NRI's position genuinely differs from a resident's, and where most of the saving lives.

A resident of India is taxed on worldwide income, so the entire perquisite at exercise is Indian-taxable. An NRI is taxed in India only on income that accrues or arises in India, or is received in India. Salary, including the salary perquisite from an ESOP, is treated as Indian-source only to the extent it relates to services rendered in India. The settled principle, reflected in how the Act sources salary and reinforced by tribunal rulings, is that an ESOP perquisite is apportioned by the period of service the employee rendered in India during the grant-to-vest window.

In plain terms: an option rewards you for the work you do between grant and vest. If, during that window, you worked partly in India and partly abroad, only the India portion of the resulting perquisite is Indian-source and taxable in India. The rest relates to services rendered outside India and, for an NRI, falls outside India's net.

The apportionment is usually done on days:

India-taxable perquisite = total perquisite times (days of service in India during grant-to-vest) divided by (total days in the grant-to-vest period).

Two clean ends of the spectrum make the principle obvious. If you were granted options while working in the Bengaluru office and the entire vesting period was spent in India before you moved abroad and exercised later as an NRI, essentially the whole perquisite relates to India service and is taxable in India. At the other end, if you were granted options after you had already relocated and the entire grant-to-vest period was spent working abroad, with no India service at all, the perquisite may relate entirely to services rendered outside India and fall outside India's taxing right, even though the issuer is an Indian company. Most real cases sit in between, with a fraction of the vesting period in India, and the apportioned fraction is what India taxes.

The practical friction is documentation. The employer's payroll often deducts TDS on the full perquisite by default, because Indian payroll systems are built for residents. As an NRI you then have to establish the days-in-India fraction, get the employer to apply it or claim the excess back when you file your return. Keep your travel records, your relocation date, and your grant and vesting schedule, because the apportionment is only as good as the evidence behind it.

The DPIIT startup deferral: paying tax on a paper gain, later

The perquisite-at-exercise rule creates a brutal problem for startup employees: you owe salary tax, in cash, on a gain locked inside shares you cannot sell. To address this, the law gives employees of eligible startups a deferral of the perquisite tax.

The qualifying conditions are specific. The company must be recognised as a startup by the Department for Promotion of Industry and Internal Trade (DPIIT), and it must be an eligible start-up under Section 80-IAC of the Income-tax Act. Section 80-IAC, in turn, requires the entity to be a private limited company or an LLP, to be incorporated within the eligibility window the government sets (currently incorporated on or after April 1, 2016 and within the running cut-off date), and to stay within the turnover ceiling (a turnover under Rs 100 crore in the relevant year). DPIIT recognition is the mandatory first gate; without it the company cannot be an eligible startup for this purpose, and the deferral simply is not available.

Where the conditions are met, the deferral works on timing. Instead of the perquisite tax and the employer TDS falling due in the year of exercise, they are pushed to within 14 days of the earliest of three triggers:

• the expiry of five years from the end of the financial year in which the shares were allotted;
• the date you sell the shares; or
• the date you cease to be an employee of the company.

Whichever of those comes first sets the clock for the 14-day payment. The tax amount is still computed on the perquisite as at exercise; the deferral only moves when you pay, not how much. The point is cash flow. You are no longer forced to find tax money for a gain you cannot monetise, and the obligation crystallises when there is either a liquidity event (sale), an exit (leaving), or a hard five-year backstop.

For an NRI the deferral works on the same terms, because it attaches to the startup and the employee, not to residency. An NRI employee of a DPIIT-recognised eligible startup gets the same five-year-or-earlier deferral that a resident does. Two things to keep straight: the deferral is about the timing of the perquisite tax, while the India-service apportionment still decides how much of that perquisite is Indian-taxable at all. And the deferral is on the perquisite (salary) stage only. The capital gain on a later sale is a separate computation with its own timing.

The capital gain on sale: unlisted versus listed is the whole game

Once you sell, the second tax event arrives, and the rate hinges on whether the Indian shares are unlisted or listed, because the two sit under different sections with different holding periods and different rates.

For unlisted Indian shares, which is what most startup ESOP shares are until an IPO, the holding-period line is 24 months. Held for more than 24 months from exercise, the gain is long-term and taxed at 12.5% under Section 112, without indexation, under the regime that applies to transfers on or after July 23, 2024 (the earlier non-resident rate was 10%, and indexation was removed in the same overhaul). Held for 24 months or less, the gain is short-term and taxed at your applicable slab rate, which on a large gain runs to roughly 30% plus surcharge and cess. There is no Rs 1.25 lakh exemption on unlisted shares; that exemption lives in Section 112A and is reserved for listed, STT-paid equity.

For listed Indian shares, the holding-period line is shorter, 12 months, and the rates come from the listed-equity sections. Long-term gains (held over 12 months) on listed, STT-paid shares fall under Section 112A: 12.5% on gains above the Rs 1.25 lakh annual exemption. Short-term gains (held 12 months or less) on listed, STT-paid shares fall under Section 111A at 20% (raised from 15% in the July 2024 overhaul). So a listed RSU that vests, is held a year and a day, and then sold, enjoys both the lower 12-month threshold and the Rs 1.25 lakh shield, neither of which an unlisted startup share gets.

The cost of acquisition for the gain, in both cases, is the FMV that was taken at exercise for the perquisite. The gain is the sale price minus that FMV-at-exercise (and minus selling costs). You are not re-taxed on the perquisite slice; the capital gains computation only catches the appreciation after exercise.

A repatriation note that catches people: if the shares were acquired and held in a way that lets you repatriate, sale proceeds net of tax can go abroad; if the proceeds land in your NRO account, they fall under the USD 1 million per financial year NRO remittance cap, with Form 15CA and a Chartered Accountant's Form 15CB. The tax and the money-movement are separate questions, and both have to clear.

The home-country layer: the same income, taxed again, then credited

India is only half the picture. As a tax resident of the US, UK, Canada or another country, you are taxed there on your worldwide income, which includes the same ESOP perquisite and the same capital gain. Left unmanaged, that is genuine double taxation. The relief is the foreign tax credit under the relevant double-tax treaty.

The shape of the relief depends on which country and which stage:

• The perquisite (salary) stage. Your country of residence will typically tax the perquisite as employment income when it is recognised under its own rules (the US, for instance, taxes the spread at exercise for a non-qualified option). Where India has also taxed the India-service slice of that perquisite, you claim a credit in your country of residence for the Indian tax paid on the overlapping portion, capped at the local tax on that same income. For the slice that relates to services rendered outside India, there is no Indian tax to credit, because India never taxed it; that slice is simply taxed in your country of residence.
• The capital gain stage. India taxes the gain on sale of Indian company shares. Your country of residence usually taxes the same gain. You claim a foreign tax credit at home for the Indian capital gains tax paid, again capped at the home tax on that gain. The treaty Article that allocates capital gains, and whether the share is listed or unlisted, can affect which country has the primary right, so the credit direction is worth confirming rather than assuming.

A clean structural point worth stating plainly: for a pure NRI with no India service period during the grant-to-vest window, the perquisite may fall outside India's net entirely. In that case there is no Indian perquisite tax to credit, and the perquisite is taxed only in the country of residence. The double-tax machinery only bites where both countries actually tax the same slice.

When India is the country giving credit (less common for an NRI on this income, but relevant if you become a resident or RNOR in the year of sale), the mechanism is Form 67, which must be filed to claim treaty credit in your Indian return. The companion read is the foreign tax credit and Form 67; the treaty mechanics for the US case are in the India-US DTAA deep dive.

A FEMA aside, because it confuses people: holding shares of an Indian company is not the same, for exchange-control purposes, as an NRI holding foreign-company shares. This guide is about Indian company stock. The reporting and repatriation rules for foreign shares you hold abroad are a separate topic, and if you hold both, your Schedule FA reporting in India has to capture the foreign ones. See Schedule FA foreign asset reporting.

Worked example: a startup ESOP from exercise to sale to credit

Take Ananya, an NRI in London. She joined a Bengaluru startup, was granted ESOPs, worked in India for part of the vesting period, then relocated to the UK and continued vesting there. In FY 2025-26 she exercises her vested options. The numbers:

• FMV at exercise minus exercise price, across all shares exercised: Rs 20,00,000. This is the gross perquisite.
• Grant-to-vest window: 48 months total. Of that, she worked in India for 18 months before relocating, and abroad for 30 months.
• The company is DPIIT-recognised and an eligible startup under Section 80-IAC.
• She later sells the shares after holding them more than 24 months from exercise, for a capital gain over FMV-at-exercise of Rs 15,00,000. The shares are unlisted.

Step 1: apportion the perquisite to India service

Only the India-service slice of the perquisite is Indian-taxable for an NRI. The fraction is 18 of 48 months.

India-taxable perquisite = Rs 20,00,000 times (18 divided by 48) = Rs 20,00,000 times 0.375 = Rs 7,50,000.

So of the Rs 20,00,000 gross perquisite, only Rs 7,50,000 is salary income chargeable in India. The remaining Rs 12,50,000 relates to services rendered outside India and falls outside India's taxing right for an NRI. That alone cuts the Indian perquisite base by nearly two-thirds.

Step 2: the India perquisite tax, and the DPIIT deferral

The Rs 7,50,000 is added to Ananya's Indian salary income and taxed at slab rates. Taking an illustrative effective rate of 30% plus 4% cess (about 31.2%) on this slice for a high earner, the Indian perquisite tax is roughly:

Rs 7,50,000 times 31.2% = approximately Rs 2,34,000.

Because the startup is DPIIT-recognised and eligible, this perquisite tax (and the employer TDS on it) need not be paid at exercise. It is deferred to within 14 days of the earliest of: five years from the end of FY 2025-26, the date she sells, or the date she leaves the company. If she sells in, say, year three, the sale is the earliest trigger and the perquisite tax falls due then, alongside the capital gains tax, but at least it lines up with a liquidity event rather than hitting her on a paper gain.

Step 3: the capital gain on sale

She sells after more than 24 months from exercise, so the gain is long-term on unlisted shares, taxed at 12.5% under Section 112 without indexation.

Capital gains tax = Rs 15,00,000 times 12.5% = Rs 1,87,500 (plus applicable surcharge and cess, ignored here for clarity).

Step 4: total India tax, and the UK credit

Her total Indian tax across both stages is about Rs 2,34,000 (perquisite) plus Rs 1,87,500 (capital gain) = Rs 4,21,500.

In the UK, Ananya is taxed on her worldwide income. HMRC will look at the perquisite when it is taxable under UK rules and the capital gain on disposal. On the Rs 7,50,000 perquisite slice that India taxed, she claims UK foreign tax credit for the roughly Rs 2,34,000 of Indian tax, capped at the UK tax on that same income. On the Rs 12,50,000 slice India did not tax, there is no Indian credit, and the UK taxes it in full. On the capital gain, she claims UK credit for the Rs 1,87,500 Indian tax, capped at the UK capital gains tax on the same gain. Where the UK rate on a slice is higher than the Indian rate, she tops up the difference to HMRC; where it is lower, the credit is capped and the excess Indian tax is not refunded.

The honest read on this example: the apportionment did the heavy lifting on the India side by removing Rs 12,50,000 from the Indian base, the deferral solved the cash-flow timing, and the foreign tax credit stopped the genuinely double-taxed slices from being taxed twice over. None of the three happens automatically. Each needs documentation and a correctly filed return in both countries.

Edge cases

DPIIT eligibility is narrower than founders claim. Plenty of companies describe themselves as startups without holding DPIIT recognition or meeting Section 80-IAC (incorporation window, turnover ceiling, entity type). If the company is not an eligible startup, there is no deferral, full stop, and the perquisite tax is due at exercise even though the shares are illiquid. Confirm the company's DPIIT recognition number and its Section 80-IAC status before you assume the five-year cushion. The deferral is also not automatic across all employees in all situations; it is a relief the eligible employer applies, so coordinate with payroll.

Apportionment cuts both ways. The India-service fraction shrinks the Indian perquisite for someone who vested mostly abroad, but it works in reverse for someone who vested mostly in India and only recently moved. If your whole grant-to-vest window was in India, expect close to the full perquisite to be Indian-taxable, NRI status notwithstanding, because the income relates to Indian service. The fraction is driven by where you worked during vesting, not by where you are sitting on the day you exercise. And the burden of proving the fraction is on you, with travel and relocation records, since payroll defaults to taxing the whole amount.

Listed versus unlisted changes the rate and the shield. If the company IPOs and your shares become listed before you sell, the gain can move into Section 112A territory, with the 12-month long-term line and the Rs 1.25 lakh annual exemption, instead of the unlisted 24-month line with no exemption. The status of the share at the time of transfer matters. Sequencing a sale before or after listing, and tracking when the holding period crosses each threshold, can change the bill materially.

Cross-border double tax is not always symmetric. The assumption that India taxes first and your home country always gives a clean credit does not hold uniformly. For the perquisite, only the India-service slice is creditable, because that is all India taxed. For the capital gain, the treaty Article that allocates gains, and whether the home country even taxes the gain (the UAE, for instance, has no personal income tax, so there is no home-country gain tax to worry about, and no credit either way), changes the picture. And if you change residency status mid-way, for example becoming RNOR or resident in the year of sale, the Indian taxing right over your worldwide income shifts, which can pull more of the income into India's net and change which country gives the credit. Map your residency year by year; see NRI residency and RNOR rules.

The closing read

For an NRI sitting on Indian company options, the instinct is to dread the perquisite at exercise, because the payslip shows tax on money you cannot touch. The honest read is that the Indian bite is usually smaller than that first payslip implies, and it is smaller for two structural reasons that are specific to your situation. First, the India-service apportionment means you only pay Indian tax on the slice of the perquisite earned while working in India, and if most of your vesting happened abroad, most of the perquisite escapes India entirely. Second, if the company is a DPIIT-recognised eligible startup, the deferral lines the cash payment up with a liquidity event rather than forcing it on a paper gain.

What you should not do is treat Indian company stock like your US employer's RSUs. The heads of income are different, the holding-period lines are different (24 months for unlisted, 12 for listed), the rates are different, and the NRI apportionment has no analogue in the way your foreign employer's stock is taxed at home. Keep three things on file from day one: your grant and vesting schedule, your day-by-day record of where you worked during vesting, and the company's DPIIT and Section 80-IAC status. Those three documents are what turn the apportionment, the deferral, and the foreign tax credit from theory into a lower, defensible tax bill in both countries.

Related guides

• RSU and ESOP taxation for NRIs
• Capital gains tax for NRIs on shares and mutual funds
• Foreign tax credit and Form 67
• NRI residency and RNOR rules
• NRI investing in Indian startups and unlisted shares
• Tax-efficient investing for NRIs
• NRI portfolio asset allocation
• The India-US DTAA deep dive
• Schedule FA foreign asset reporting
• The ESOP and RSU ITAT ruling, 2025
• Angel tax abolition and NRI startups

Disclaimer

This guide is general information for Indian expats, not tax or investment advice, and it does not create an adviser relationship. The treatment of ESOPs and RSUs of Indian companies turns on facts specific to you: the company's DPIIT and Section 80-IAC status, your exact grant and vesting dates, where you worked during the vesting period, your residency status in each year under Indian law and under your country of residence, and the applicable double-tax treaty. Tax rates, holding-period thresholds and the startup eligibility window change with each Finance Act, and tribunal positions on ESOP apportionment continue to evolve. Confirm the current law and your own numbers with a qualified Chartered Accountant in India and a tax adviser in your country of residence before you exercise, sell, or file. Figures used in the worked example are illustrative and ignore surcharge and cess except where stated.