When you have an Indian team and want to align them with your US / UK parent company's equity outcomes, ESOPs from the parent are the natural answer. The complication is that the Indian employee is acquiring foreign securities, which puts the entire arrangement under FEMA and the Liberalised Remittance Scheme (LRS).
How the arrangement actually works
Most foreign startups structure it as direct grants from the parent to the Indian employee, with the Indian subsidiary acting as the administrative agent.
- Parent (US / UK / Delaware) adopts an ESOP scheme covering its own shares.
- Indian employee is granted options under the parent's scheme — typically with a 4-year vest, 1-year cliff.
- On exercise, the Indian employee remits the exercise price from India to the parent (using LRS), and the parent issues the shares.
- On sale of the shares, the Indian employee remits the sale proceeds back to India (FEMA-permitted).
FEMA and the LRS limit
Under FEMA's Liberalised Remittance Scheme, an Indian resident can remit up to USD 250,000 per financial year for permitted current and capital account transactions — including acquisition of foreign securities. For most Indian employees exercising annual vests of a foreign startup's options, this limit is comfortable.
Issues arise when:
- Employee has accumulated vested options worth >$250k that they want to exercise all at once (typically at an exit event). They have to spread the exercise across multiple financial years.
- Employee is exercising at a meaningful spread (FMV at exercise much higher than exercise price). The perquisite tax can exceed the cash outlay — they can run out of LRS room when adding the exercise price.
- Employee has already used LRS room for other foreign-asset purposes (foreign real estate, mutual funds, etc.).
ESOP plan + LRS planning, end to end
FastLegal's tax specialist plans your ESOP grants against each Indian employee's LRS room, models the perquisite tax at exercise, structures the exercise to minimise total tax outflow, and files the FEMA-required reporting (Form A2, Schedule for purchase of foreign securities). One engagement, one consultant.
Tax at exercise — the moment of pain
When the Indian employee exercises a vested option, the difference between Fair Market Value (FMV) of the share at exercise and the exercise price is taxed as a perquisite under salary income — at the employee's marginal rate (up to ~42.7% including surcharge and cess).
This is the moment that catches Indian employees off guard. They exercise excitedly; they discover they owe income tax on a non-cash gain. They hold shares, not cash, but they owe tax in cash. The Indian subsidiary (or its parent acting through the subsidiary) must withhold and deposit this TDS at the time of exercise.
The DPIIT 48-month deferral
Indian tax law gives a meaningful relief: eligible DPIIT-recognised startups can defer the perquisite tax for up to 48 months from the date of exercise (or until the employee sells, or until the employee leaves the employer, whichever is earliest). This is one of the most useful tax provisions for Indian-side employees of foreign startups.
The catch is DPIIT eligibility. The startup must be recognised by DPIIT (Department for Promotion of Industry and Internal Trade) under the Startup India programme. For a foreign-parent startup, the recognition is on the Indian subsidiary, with conditions — turnover under ₹100 crore, age under 10 years, working on innovation / scalability of products or processes.
Tax at sale — capital gains
When the Indian employee eventually sells the foreign shares — usually at a secondary or exit event — the difference between sale price and FMV at exercise is a capital gain. Rates:
- Long-term capital gains (LTCG): if foreign unlisted shares are held for over 24 months. Rate 12.5% (Finance Act 2024) without indexation.
- Short-term capital gains (STCG): if held for under 24 months. Taxed at the employee's slab rate.
- Currency conversion: gains computed in INR using the RBI reference rate on the date of sale.
If the foreign parent IPOs and the shares become listed, the long-term threshold drops to 12 months (for listed shares), but the rate stays at 12.5% on the gain above ₹1.25 lakh per year (recently increased).
Operational tips
- Set the exercise price at FMV on grant date. Issuing at face value creates a perquisite at grant time, which is taxable immediately — usually a worse outcome.
- Get a registered valuer to determine FMV at each grant date. The valuation underpins all the tax positions and is the first thing the IT department asks for.
- Issue grant letters within 60 days of the board approving the grant. Verbal grants don't vest.
- Track the LRS room of each Indian employee — your stock administration system needs this field.
- Plan the exercise schedule so each employee's perquisite tax is spread across financial years, not concentrated in the exit year.
- For DPIIT-eligible startups, file the deferral declaration with the employer before the next 24Q TDS return.
Frequently asked questions
Can we issue our parent's ESOPs without an Indian subsidiary?+
Yes — through the EOR model, but the EOR is not party to the option grant. The parent grants directly to the employee; the EOR just runs payroll. The perquisite TDS at exercise becomes the EOR's responsibility, which not all EORs are set up to handle. Confirm before granting.
What if our employee can't afford the perquisite tax at exercise?+
Three patterns: (1) cashless exercise — sell enough shares immediately to fund the tax; (2) loan from the company against the vesting shares; (3) defer exercise to a date when the employee has the cash.
Do we need RBI approval for the ESOP scheme?+
If the scheme is administered by the Indian subsidiary on behalf of the foreign parent, FEMA notification and AD-bank intimation are needed. Not approval, but reporting. Get a FEMA-aware adviser.
What's the alternative if ESOPs are too complex?+
Phantom stock (synthetic equity paid as cash bonus equivalent to share value appreciation). Cleaner administratively, taxed entirely as salary. Loses the capital-gains-on-sale benefit and creates a cash drag at exit.
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