Why ESOPs are landing MNC employees in tax trouble and how to report them correctly in ITR

ESOPs Taxation Rules

If you work for a multinational company and hold Employee Stock Option Plans (ESOPs) or Restricted Stock Units (RSUs) of a foreign parent, chances are you have either received an income tax alert or may receive one soon.

Over the past few months, the income tax department has stepped up outreach to employees whose returns show gaps in reporting foreign shares or overseas-linked benefits.

These communications are not routine scrutiny notices. They are part of a wider compliance push on undisclosed foreign income and assets, driven by sharper data matching and global information sharing that now leaves very little outside the tax net.

What’s triggering the notices now

India now receives financial data from overseas jurisdictions under global reporting frameworks such as Common Reporting Standard (CRS), Foreign Account Tax Compliance Act (FATCA), and Automatic Exchange of Information (AEOI). This allows the tax department to cross-check disclosures made in income tax returns with information reported by foreign employers, brokers and custodians.

Where discrepancies are found such as foreign ESOP shares not disclosed in the return the system automatically flags them.

“Where a mismatch is detected for instance, overseas bank accounts, foreign shareholdings, ESOPs/RSUs granted by foreign parent companies, or other overseas assets that are not reported in Schedule FA (Foreign Assets) or where related income is not reported in Schedule FSI (Foreign Source Income), the system may flag the discrepancy and issues a compliance alert or income tax notice,” said CA Suresh Surana.

These alerts are part of the CBDT’s ‘NUDGE’ initiative and are meant to prompt voluntary correction before cases escalate into scrutiny or penalty proceedings.

Which ESOPs are treated as foreign assets

Not all ESOPs require disclosure. The key distinction is between future entitlement and ownership.

Unvested ESOPs are generally not regarded as foreign assets, as the employee does not yet have a legally enforceable right over the shares. “As a general principle, unvested ESOPs are typically not regarded as foreign assets, since the employee does not yet have a vested or enforceable right to the underlying shares,” said Surana.

The position becomes clearer once ESOPs are exercised. At that stage, shares are allotted and the employee becomes the beneficial owner of foreign equity.

“Upon exercise and allotment, the employee acquires beneficial ownership of foreign equity shares. Such exercised ESOP shares are generally regarded as reportable foreign assets, irrespective of whether they are listed or unlisted, subject to lock-in, or yet to be sold,” said Surana.

In other words, the obligation to disclose arises from holding the foreign shares, not from selling them or earning gains.

"If the shares belong to the foreign holding company they are required to be disclosed in Schedule FA ( Foreign Assets) and Schedule AL (Asset-Liability). If the employee earns any income on such foreign shares and claims relief of taxes deducted thereon outside India, the details are to be captured under Schedule FSI (Foreign Source Income) and Schedule TR (Tax Relief)," said Maneesh Bawa, Partner, Nangia Global.

Upon sale of the ESOPs employees should ensure full and correct disclosure in Schedule CG (Capital Gains).

Moreover, for disclosure purposes, employees often make the mistake of using market value instead of cost. “Only the cost of such assets in hands of the employees needs to be disclosed,” Bawa clarified.

Why employees are flagged even after TDS

A common misconception among employees is that once tax is deducted by the employer at vesting, nothing more needs to be done. That assumption is proving costly.

“While employers generally deduct tax at source on ESOPs, this deduction only addresses the taxability of the benefit and does not substitute the employee’s separate reporting responsibility,” said Surana.

Disclosure of foreign assets is a personal compliance obligation and must be done in the relevant ITR schedules, irrespective of TDS, lock-in periods or whether the shares were sold during the year.

“ESOPs received by employees are usually of the foreign holding company. Once ESOPs are exercised in the hands of the employees such shares are required to be reported in the income tax returns. Usually, the employees miss out on capturing these details in the ITRs,” said Bawa.

What to do after receiving a notice

Receiving a notice does not automatically mean penalties. Most of these communications are intended to prompt voluntary correction.

“Upon receiving such communications, employees should first carefully review the nature of the notice or alert to determine whether it is a system-generated compliance nudge, an intimation, or a formal notice under the Income-tax Act, 1961," said Surana.

Employees should reconcile ESOP details with employer records and overseas custodians, verify whether foreign shares were held during the year, and ensure correct disclosure in Schedule FA and other applicable schedules. Where omissions are found, file a revised or belated return by December 31, 2025.

The bottom line

ESOPs are no longer just a compensation perk, they come with a compliance responsibility. With global data sharing now routine, disclosure gaps are easy for tax systems to spot. For MNC employees, understanding when ownership begins and where it must be reported is now just as important as knowing how ESOPs are taxed.

Missing a schedule may seem like a small oversight, but it is increasingly what’s bringing the taxman to employees’ inboxes.