If you participate in your company's ESPP, you are buying shares of a company at a discount.
That discount creates a tax event at the time of purchase. When you eventually sell, it creates another.
And because the money moves across borders, there are FEMA and LRS considerations on both ends.
This guide walks through how ESPP is taxed at each stage, how to calculate what you owe, and what to report in your ITR.
Table of contents
- How ESPP works
- Tax at purchase
- How is the perquisite value calculated?
- What TDS does your employer deduct?
- The LRS and TCS angle
- After purchase, the shares are just foreign equity
- Capital gains when you sell
- Schedule FA requirement
- Dividends and W-8BEN
- Bringing money back to India
- About Paasa
How ESPP works
An Employee Stock Purchase Plan lets you buy shares of your employer's parent company at a discount to the market price. Here is the basic structure:
Offering period: You elect to contribute a fixed percentage of your salary into an ESPP account. This contribution is deducted from your post-tax salary each month over an offering period of typically six months.
Purchase date: At the end of the offering period, your accumulated contributions are used to buy shares.
The purchase price is at a discount to the market price.
Many plans include a lookback provision, where the purchase price is the lower of the share price on the offering start date or the purchase date.
This can make the effective discount significantly larger if the stock has gone up during the offering period.
Example of how a lookback works:
Suppose your ESPP plan offers a 15% discount, and you need to pay only 85% of the effective price.
Suppose stock price was $160 on the start date, and went up to $210 on the actual purchase date.
| Amount | |
|---|---|
| Share price at start of offering period | $160 |
| Share price on purchase date | $210 |
| Purchase price without lookback (85% of $210) | $178.50 |
| Purchase price with lookback (85% of $160) | $136 |
| Effective discount with lookback | $210 − $136 = $74 per share |
The lookback provision is what makes ESPPs particularly valuable. It also means the taxable discount is larger than the headline "15%" might suggest.
If the stock falls during the offering period, you get the stocks at the market price on the purchase date. You still get the standard 15% discount off the purchase-date price. The lookback only adds value when the stock goes up.
Tax at purchase
When shares are purchased on the purchase date, the discount you received is treated as a perquisite under Section 17(2) of the Income Tax Act and taxed as salary income in that financial year.
The taxable value is: FMV on purchase date minus the actual price you paid.
Your accumulated contributions (the money you set aside from your salary) are not taxed again. Only the discount is. You have already paid tax on your salary before the contributions were deducted.
Note: India taxes the discount as salary at the time of purchase, regardless of when you sell. The "qualifying disposition" and "disqualifying disposition" concepts that determine tax timing under US law do not apply for Indian tax residents. If you have seen these terms in your company's ESPP documentation, they describe your US tax treatment, not your Indian tax treatment.
How is the perquisite value calculated?
FMV on purchase date minus actual purchase price, multiplied by number of shares, converted to INR using the SBI TT Buying Rate on the last day of the month preceding the month of purchase.
Example
Suppose the purchase date is September 30, 2025. Google's closing price on that date is $210 per share. With the lookback, your purchase price is $136 per share. You receive 60 shares. The SBI TTBR on August 31, 2025 is ₹84.50.
| Amount | Note | |
|---|---|---|
| FMV on purchase date (A) | $210 per share | |
| Actual purchase price (B) | $136 per share | 85% of $160 offering-start price, via lookback |
| Discount per share (A minus B) | $74 | |
| Total discount (C) | $4,440 | 60 shares × $74 |
| SBI TTBR on August 31, 2025 (D) | ₹84.50 | Last day of month preceding September |
| Perquisite value (C × D) | ₹3,75,180 | Added to taxable as salary |
This ₹3,75,180 appears in your Form 16 under perquisites and flows into Schedule S of your ITR-2 alongside your regular salary.
How to read your Form 16 when you have RSUs or ESPP shares
What TDS does your employer deduct?
Your employer deducts TDS on the perquisite value at the time of purchase, at your applicable slab rate. For most senior employees in the 30% bracket, TDS is calculated at 30% on the perquisite value.
Some employers handle this through a sell-to-cover mechanism; selling a portion of the shares on purchase day to fund the TDS liability. Others add it to the regular payroll TDS for the month. Check with your HR or payroll team to understand how your company handles it.
The TDS deducted will appear in Part A of your Form 16 and serves as your advance tax credit when you file.
The LRS and TCS angle
Your ESPP contributions are remitted outside India. They leave your account and flow to the ESPP trust administered by your company's stock plan provider.
Under RBI's Liberalised Remittance Scheme (LRS), this counts as an outward remittance in your name, even though your employer processes it.
The LRS limit for Indian residents is USD $250,000 per financial year. ESPP contributions count toward this limit.
For most salaried employees, contributions of 10–15% of salary are well within the limit, but it is worth tracking if you have other LRS usage (overseas travel, foreign investments, education).
TCS on contributions above ₹10 lakh
Under Section 206C(1G) of the Income Tax Act, your Authorized Dealer bank is required to collect Tax Collected at Source (TCS) at 20% on the portion of your total LRS remittances in a financial year that exceeds ₹10 lakh.
This applies to investment-purpose remittances including ESPP contributions, effective from FY 2025-26.
This TCS is not an additional tax, it is a prepayment toward your tax liability for the year and is fully creditable when you file your ITR.
How to adjust TCS against your advance tax liability
Example
Your total ESPP contributions for FY 2025-26 are ₹14 lakh.
| Amount | |
|---|---|
| Total LRS remittance | ₹14,00,000 |
| TCS-free threshold | ₹10,00,000 |
| Amount subject to TCS | ₹4,00,000 |
| TCS at 20% | ₹80,000 |
This ₹80,000 is deposited with the government by your bank at the time of remittance and credited to your 26AS. You claim it back against your final tax liability when you file.
After purchase, the shares are just foreign equity
Once your ESPP shares land in your brokerage account, they are treated as ordinary foreign equity for all purposes going forward.
The same rules that apply to any Indian resident holding US or foreign-listed shares now apply to your ESPP holding: capital gains on sale, Schedule FA disclosure, dividends taxed as income from other sources.
How global stocks and ETFs are taxed for Indian investors
Capital gains when you sell
When you sell your ESPP shares, the gain is taxed as capital gains. The calculation follows the same rules as any other foreign equity sale.
Cost of acquisition
Your cost of acquisition is the FMV on the purchase date, converted to INR using the SBI TTBR on the last day of the month preceding the month of purchase.
This is the same FMV used to calculate the perquisite, not the discounted price you actually paid.
The discount was already taxed as salary. You are not taxed on it again.
Holding period
Shares held for more than 24 months from purchase date are long-term; under 24 months is short-term. The 24-month clock starts from the purchase date.
Full breakdown of LTCG vs STCG on foreign equity with examples
| Holding period from purchase date | Classification | Tax |
|---|---|---|
| Up to 24 months | STCG | At your income slab rate |
| More than 24 months | LTCG | 12.5%, without indexation |
Example
Suppose you purchased 60 ESPP shares on September 30, 2025.
Google's closing price on that date was $210 per share. Because of the lookback, your actual purchase price was $136 per share. The SBI TTBR on August 31, 2025 is ₹84.50.
Your cost of acquisition is the FMV on purchase date: $210, not the $136 you actually paid. The discount of $74 per share was already taxed as salary. You are not taxed on it again.
You sell all 60 shares on February 10, 2026, at $250 per share. The SBI TTBR on January 31, 2026 is ₹86.30.
| Amount | Note | |
|---|---|---|
| Total sale proceeds | $15,000 | 60 shares × $250 |
| SBI TTBR on January 31, 2026 | ₹86.30 | Last day of month preceding February |
| Sale proceeds in INR (A) | ₹12,94,500 | |
| Cost of acquisition in INR (B) | ₹10,64,700 | FMV on purchase date, already taxed as salary |
| Capital gain (A minus B) | ₹2,29,800 | |
| Holding period | 4 months | September 30, 2025 to February 10, 2026 |
| Classification | STCG | Under 24 months |
| Tax at 30% | ₹68,940 | |
| Surcharge at 10% | ₹6,894 | Applicable if total income ₹50L–₹1Cr |
| Cess at 4% | ₹3,033 | On tax + surcharge |
| Total tax | ₹78,867 |
You owe ₹78,867 in total tax on a gain of ₹2,29,800. Capital gains on foreign shares are reported under Schedule CG in your ITR-2.
How to file your ITR when you hold foreign equity
Do I need to disclose them in Schedule FA?
Like any foreign equity, your ESPP shares must be disclosed in Schedule FA of your ITR every year you hold them, even if you did not sell. The disclosure follows the calendar year (January 1 to December 31), not the Indian financial year.
Initial value is the cost of acquisition (FMV on purchase date in INR). Peak and closing values use the SBI TTBR for the relevant dates.
If you hold shares from multiple ESPP purchase dates, each batch is disclosed separately in Table A3 with its own purchase date and initial value.
Dividends and W-8BEN
If your company pays dividends on the shares you hold, the US withholds tax before the payment reaches you.
This withholding tax is 30% by default, or 25% if you have filed a W-8BEN form with your broker claiming the India-US DTAA rate.
In India, the gross dividend is taxable as income from other sources at your slab rate. The US withholding already deducted is claimable as a Foreign Tax Credit via Form 67.
File Form 67 before the ITR due date if you have foreign tax credit to claim.
How foreign dividend income is taxed for Indian investors
Bringing money back to India
When you sell your ESPP shares, the sale proceeds sit in your foreign brokerage account in USD.
Bringing them back to India is not a taxable event in itself as repatriation of sale proceeds is permitted under FEMA and does not attract additional tax in India.
The capital gains tax is on the gain at the point of sale, not on the transfer of funds. When the money comes in, your bank will typically ask for the purpose of the inward remittance. Keep the broker contract note and the sale confirmation as supporting documentation.
About Paasa
Paasa is the platform used by global Indian investors, HNIs, and family offices to diversify their wealth across global markets like US, UK, China, Singapore, Switzerland, and beyond.
For ESPP holders, Paasa makes it easier to manage your equity compensation alongside the rest of your portfolio:
- Diversify ESPP proceeds across global markets as they vest and sell
- End of year tax documents covering capital gains, dividends, and Schedule FA in INR
- Consolidated reports calculated using mandatory SBI TT Buying Rates
- Optional access to advisory for taxation, FEMA, LRS, and compliance questions
If you are an ESPP holder with questions around managing your global wealth, feel free to reach out to our team.
