Budget 2026: Why India Must Modernise ESOP Tax Rules For A Global Workforce

Budget 2026: In a typical multinational company (MNC), employee stock option plans (ESOPs) are structured globally to attract, retain, and grow talent. These plans are granted to employees across multiple countries, including those participating in cross-border mobility programmes.

Unfortunately, the taxation of ESOPs varies widely across countries. For instance, India imposes salary tax on ESOPs at the time of allotment, whereas Singapore allows employees to pay tax at the time of grant.

On account of these complex taxing rules in various countries, there could be double taxation. While tax treaties aim to avoid double taxation, the procedures under domestic laws should catch up to address the broad aim of the tax treaties.

For example, “OECD guidelines on ESOP taxation provide that contracting states should facilitate relief from double taxation even if the year of taxation is not uniform.  Accordingly, to this extent, the domestic Income Tax Act should provide exclusive guidelines to address the mechanism around tax relief by permitting the carry forward of foreign tax credit or revising past years’ tax returns to claim foreign tax credit (FTC), etc,” says Sudhakar Sethuraman, Partner, Deloitte India.

Are current ESOP taxation rules equipped to handle remote work, split-payrolls and globally mobile executives?

The existing framework under the Income Tax Act should explicitly outline ESOP taxation rules for mobile employees. While there are compliances relating to trailing tax liabilities and the allocation of taxation rights during the grant-to-vesting period, dedicated guidelines would go a long way in providing clarity to the mobile workforce.

Why do India’s sourcing and apportionment rules differ from OECD practice, and what litigation risks does this create?

India taxes stock-based compensation, including ESOPs, based on where the underlying employment services are performed. “For employees who work in multiple countries over the life of an option, only part of the benefit should logically relate to services rendered in India. However, Indian tax law does not provide specific rules for calculating this cross-border split,” informs Sethuraman.

Globally, the OECD recommends a workday-based approach, dividing the benefit across countries based on days worked during the relevant period. Typically, India’s salary taxation is determined with reference to the Indian employment during the grant-to-vest period. 

Should India Adopt Work-Day Apportionment for ESOPs?

Tax experts want India to shift to ‘work-day-based’ apportionment of ESOPs like most global tax regimes. That is because “the OECD’s work-day apportionment method is simple, transparent, and widely adopted, especially for mobile employees. It allocates ESOP-related benefits proportionately to the days an employee has physically worked in each jurisdiction, bringing greater uniformity and helping reduce the risk of double taxation,” says Sethuraman.

How are employees double-taxed when vesting and exercise periods span multiple countries?

If vesting occurs in one country and exercise / allotment in another, the same ESOP gain can be taxed twice.  Conceptually, double taxation happens when the same income is taxed by more than one country.  It complicates under the following circumstances:

* When the event triggering taxation is not the same across multiple countries. For example, India taxes at the time of allotment while Singapore taxes during grant. Further, when the year of taxation is not uniform. 

* There is a possibility that the characterization of income from ESOPs is not uniform.  For example, while India will tax salary income at the time of allotment and capital gains while selling the shares, the complexity will arise when salary income itself is pushed till the point of sale. 

Reforms That Could Make India Competitive In Attracting Senior Global Talent

Sethuraman suggests adopting an explicit work-day apportionment rule (OECD-style) in guidance or statute for ESOPs, particularly for mobile employees. This would align India with global practice and help reduce disputes.

The government also needs to issue clear administrative guidance on timing (vesting vs. exercise), clarifying when India considers ESOP benefits attributable to Indian employment, and how tax withholding and foreign tax credit should apply across different categories of mobile employees, including safe harbours for remote workdays. Such clarity would reduce litigation and ensure more consistent court rulings.