Indian engineers expect equity in any credible tech offer in 2026. For foreign companies, the question is which structure — ESOP from the parent, RSU from the parent, or an Indian subsidiary's own ESOP — and how each works with FEMA, LRS and Indian tax. The mechanics are well-trodden but the details matter.
Two basic structures
| Structure | How it works | Best for |
|---|---|---|
| Parent company grants directly to Indian employee | Indian employee holds parent's shares; tax events at exercise and sale | Default for foreign-headquartered startups; aligns with global equity plan |
| Indian subsidiary's own ESOP | Subsidiary issues options on its own shares; tax mechanics under Indian law | Useful when subsidiary is being prepared for separate sale / listing |
Most foreign tech companies use the first structure. The second is rare and is generally a precursor to a separate Indian IPO or subsidiary-level transaction.
ESOP vs RSU — the difference for Indian employees
- ESOP (Employee Stock Option Plan) — option to buy shares at an exercise price. Tax event at exercise (perquisite on the spread).
- RSU (Restricted Stock Unit) — promise to deliver shares without payment. Tax event at vesting (the full FMV is perquisite).
- ESOP allows the employee to time the exercise (and the tax event) — within the option's expiry.
- RSU vests automatically — tax event at vesting whether the employee wants it or not.
- For Indian engineers, ESOPs are far more common and more flexible.
Tax mechanics for parent-company ESOPs
When the Indian employee exercises a vested option from the foreign parent:
- Spread (FMV at exercise minus exercise price) is taxable as perquisite under salary income at slab rate (up to ~42.7%).
- Indian subsidiary (or its employer-of-record) withholds TDS on this perquisite at the time of exercise.
- Employee remits the exercise price to the foreign parent under LRS — limit USD 250,000 per financial year.
- Indian subsidiary recharges the perquisite cost to the foreign parent (transfer pricing arms-length recharge).
- On sale of shares later — capital gains apply. LTCG (above 24 months unlisted / 12 months listed): 12.5%. STCG: slab rate.
Full ESOP lifecycle administered by FastLegal
FastLegal's ESOP service handles grant tracking per employee, LRS planning at exercise, perquisite TDS computation and deposit, FMV valuation coordination at each grant date, and 12BA / Form 16 reporting at year-end. Bundled in our higher-tier Payroll plans; engagement-based for standalone ESOP work.
DPIIT 48-month deferral — when it applies
If the foreign-funded Indian subsidiary is DPIIT-recognised as a startup, the perquisite tax at exercise can be deferred for up to 48 months from exercise (or until employee sells / leaves, whichever first). Subsidiary qualifies under DPIIT criteria — age under 10 years, turnover under ₹100 crore, working on innovation / scalable model — even with foreign ownership.
DPIIT deferral is one of the most underused provisions. Most foreign-startup employees pay the perquisite tax in cash at exercise; they could defer up to 4 years.
LRS — the foreign-asset acquisition limit
Indian residents can acquire foreign assets up to USD 250,000 per financial year under the Liberalised Remittance Scheme. For ESOP exercise:
- Each employee tracks their LRS room per FY.
- Exercise price + perquisite tax outflow counts toward the limit.
- Multiple FYs needed if exercise > $250k.
- Form A2 + Schedule for purchase of foreign securities filed by the AD bank at remittance.
Operational toolkit
- Cap-table software (Carta, Pulley, Capdesk) — track grants, vesting, exercises per employee.
- ESOP scheme document — approved by parent's board, reviewed by Indian counsel.
- Grant letter template per employee — vesting schedule, exercise price, expiry, treatment on termination.
- Annual valuation by a SEBI-registered merchant banker or Cat-I valuer for the parent's FMV.
- Communication kit for employees — explainer videos, FAQ docs, decision-tree for exercise.
Frequently asked questions
Can we grant options to Indian contractors (not employees)?+
Difficult under FEMA — contractor isn't an 'employee' eligible for foreign-securities purchase under most ESOP-related exemptions. Use the EOR or convert to employee for ESOP eligibility.
What's the right vesting schedule?+
Standard: 4 years, 1-year cliff, monthly vesting after cliff. Used by 90%+ of foreign tech companies hiring Indians. Some senior hires negotiate accelerated vesting on change-of-control.
Does the Indian employee pay capital gains in India when shares are sold?+
Yes — Indian residents' worldwide capital gains are taxable in India. Rate depends on holding period (12 / 24 months thresholds) and listing status.
Can we offer phantom stock instead?+
Yes — synthetic equity paid as cash bonus equivalent to share value appreciation. Simpler administratively. Taxed entirely as salary (no capital gains benefit). Loses retention impact of real equity.
Stop reading circulars. Start running clean payroll.
Every FastLegal plan ships with a dedicated payroll consultant — a real human who runs your PF, ESI, PT, TDS and Form 16 issuance, configured to your salary structure, your state, and your hiring plan. You sign off. We do the rest.