Non-Disclosure of ESOPs Offered by Overseas Entities

 1. Situation

I. Tax Department Summons
An employee received a summons from the tax department demanding an explanation for failing to disclose €X deposited in his German bank account.

II. Background
The employee had previously worked for a company whose parent entity in Germany offered him employee stock options (ESOPs). Upon his resignation, these ESOPs were automatically sold, and the proceeds (€X) were transferred to a brokerage-managed account in his name in Germany.

III. Tax Office Scrutiny
During an interaction with tax officials, the employee learned that high-value transactions in the account during the same financial year had flagged it for scrutiny under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

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2. Reality

The Income Tax Department’s foreign asset investigation wing has been actively issuing summons in such cases. India has partnered with 115 countries to exchange information on undisclosed foreign assets under global tax transparency agreements.

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3. Failure to Disclose

Many employees fail to report ESOPs, restricted stock units (RSUs), and dividends from foreign shares in their income tax returns (ITRs), often out of ignorance. These are considered foreign assets under Indian tax law.

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4. Tax Implications under the Income Tax Act

The exercise of ESOPs triggers a taxable event:

• Perquisite Tax: Tax is levied on the difference between the Fair Market Value (FMV) of the stock and the exercise price.
• Capital Gains Tax:
  • Short-term capital gains are taxed at 20%.
  • Long-term capital gains are taxed at 12.5%.

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5. Penalty under the Black Money Law

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, imposes stringent penalties for non-disclosure of foreign assets:

• A penalty of ₹10 lakh for each instance of non-disclosure.

Ignorance of the law is not an excuse. To avoid penalties and tax notices, employees should report foreign stock options as soon as they are granted, even if they do not immediately exercise them.

By staying informed and proactive, taxpayers can comply with legal obligations and avoid unnecessary scrutiny.