Planning retirement with ESOPs? Here’s how to avoid a higher tax hit on foreign shares

ESOP taxation

• Transferring ESOP shares to a personal demat account is advisable
• No tax is levied on transferring shares between demat accounts
• 12.5% tax on long-term gains from unlisted shares after 24 months

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Can an employee holding Employee Stock Option Plan (ESOP) shares in a foreign-listed company transfer holdings to a personal demat account? Today's Ask Wallet Wise query explains the tax rules for foreign shares and how timing the sale can significantly reduce tax liability.

The Ask Wallet-Wise initiative offers expert advice on personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try to get a top financial expert to address them.

I am currently employed in a multinational corporation listed on the London Stock Exchange. I have shares allotted under ESOP in the company. As part of my employment benefits, I have access to a free international demat account provided by the company.

However, as I am planning for my retirement in the next few years, I realize that I will no longer be able to continue using the company-provided demat account once I retire. Given that the shares in this account are a valuable part of my investment portfolio, I want to ensure that I can manage and liquidate them at a time of my choosing.

I was informed that if I sell the shares now, I may face a 40 percent tax deduction, as I fall under the 30 percent tax bracket.  As a result, I am considering opening a personal international demat account and transferring all the shares to this new account. This would allow me the flexibility to sell the shares at a later date, hopefully under more favourable tax conditions. Your guidance will be greatly appreciated as I navigate this transition in my financial planning.

Expert's Advice: The sale of shares are taxed as short term or long term capital gains depending on the holding period of the capital asset. The shares which are not listed in India are treated as unlisted shares for taxation purposes.

Such shares become long term capital asset after 24 months. Though you have not mentioned the date of allotment of the shares under the ESOP but as you have mentioned that if you sell the shares now your tax liability would be around 40 percent due to the highest tax slab applicable I presume you have not yet completed the holding period of 24 months to make them long term capital as short term capital gains on unlisted shares are taxed at the slab rate applicable whereas the long term capital gains are taxed at flat rate of 12.50 percent.

Once the shares complete the two years of holding period they will become long term capital assets and the profits would be taxed at flat rate of 12.50 percent irrespective of quantum of the long term capital gains so it is advisable to transfer the shares from company provided demat account to the one to be opened by you privately to reduce your ultimate tax liability. There are no tax implications when you transfer the shares held in the demat account provided by your employer to another demat account.