ESOPs Earned Abroad: Is the Cost of Acquisition Nil if the Perquisite Was Not Taxed in India?

International Tax · 3 min read

For a non-resident employee who receives ESOPs of an Indian company while working abroad, what is the cost of acquisition when the shares are later sold: the exercise price actually paid, or the fair market value (FMV) on the exercise date under section 49(2AA)? And does the answer change if the ESOP benefit was never taxed in India?

The Mumbai ITAT addressed this precise issue in Rajesh R. Hemrajani v. ITO (ITA No. 1284/Mum/2025, order dated 31 July 2026).

The facts

Hemrajani, a non-resident and UK tax resident, exercised 1,540 ESOPs at ₹1 per share when the FMV was approximately ₹1,754 per share. The ESOP benefit related to his overseas employment and was not taxable in India.

Broadly, under section 5(2) read with section 9(1)(ii), salary is taxable in India based on where the employment is exercised. As the services were rendered overseas, the ESOP benefit fell outside the Indian tax net. Article 16 of the India–UK DTAA follows the same principle.

The subsequent sale of the shares, however, is a separate taxable event. Because the shares were of an Indian company, the capital gains could be brought within the Indian tax net under section 5(2) read with section 9(1)(i). That left one question: what was the cost of those shares?

The dispute

Hemrajani claimed the exercise-date FMV as the cost of acquisition under section 49(2AA). The Revenue argued that, since the ESOP perquisite had not been taxed in India, only the amount actually paid, ₹1 per share, should be treated as the cost.

Exercise price actually paid (Revenue’s view)	₹1 per share
FMV on the exercise date (taxpayer’s view)	≈ ₹1,754 per share

What the Tribunal held

The Tribunal rejected the Revenue’s approach. Section 49(2AA) uses the expression “taken into account”. It does not require the amount to have been “offered to tax”, “subjected to tax”, “taxed”, “included in total income”, or for tax to have been paid in India. These are materially different expressions. By insisting that the amount must first have been taxed in India, the Revenue was effectively substituting its own words for those Parliament had consciously chosen.

In essence, the Revenue cannot read into the provision a condition Parliament deliberately left out. Accepting its argument would amount to adding the words “and taxed in India” to section 49(2AA). The fact that the ESOP perquisite was not taxable in India does not, by itself, restrict the cost of acquisition to the exercise price.

The assessee had also invoked Article 26 (non-discrimination) of the India–UK DTAA. Having decided the matter in the assessee’s favour under domestic law, the Tribunal did not find it necessary to adjudicate this issue.

The rulings discussed were rendered under the Income-tax Act, 1961, and section references are to that Act. This article is for general information only and does not constitute professional advice.