Claim Foreign Tax Credit under Employee Stock Option Scheme (ESOS) – Avoid Double Taxation of Income

Since the ITR filing due dates are not far, we all have started working on our ITR filings. We all should keep this important aspect in mind while filing our returns if we are getting the benefit of stock options as a part of our CTC in our annually generated Form 16.

Many of us are in employment with foreign listed companies and also receiving the benefit of holding stock options which are generally listed in foreign stock exchanges. We generally do not look at the taxability aspects of stock options in our ITR filings. We might get the benefit under double taxation in our returns with an introduction of the new Rule 128 of the Income Tax Rules applicable w.e.f 01st April 2017 so as to allow the credit of any tax paid by an Indian resident in the foreign country on an income which is also getting taxed in India in his applicable tax return.

Therefore, here we will be discussing the requirements of Rule 128 along with an understanding of the impact of the taxability of ESOS in our Income Tax Returns.

Let us understand the taxability of ESOS for an Indian resident:

ESOS is an option that is given to the employees to purchase the company’s shares at a pre-determined price at a future date. Taxability of the same is calculated at two stages:

  1. First: when shares are allotted to the employee after he has exercised his option on completion of the vesting period.
  2. Second: when the employee opts to sell the allotted shares.

Taxability under option (First)- It will be taxed as a prerequisite and the difference of FMV (Fair market value) on the date of exercise of an option and the Exercise Price will be counted as a prerequisite u/s 17(2)(vi) of an Income Tax Act, 1961 and will reflect in your Form 16 under an annexure Form 12BA.

Taxability under option (Second)– When an employee decides to sell the shares, its taxability will fall under capital gains which is the difference of sale proceeds and FMV of shares at the time of exercise of an option.

Now let us understand the documentation criteria specified under Rule 128 for claiming the tax credit on the tax which we had paid in the foreign country and also paying in India through holding of foreign company stocks and generating income therefrom either in the form of a prerequisite or capital gains.

The following documents must be retained with ourselves for claiming the benefit of FTC (Foreign tax credit) specified under Rule 128-

  1. A statement of foreign income offered to tax and the foreign tax deducted or paid on such income in Form no. 67 and
  2. Certificate of a statement specifying the nature of income and foreign tax deducted or paid:
  • From the tax authority of the foreign country; or
  • From the person responsible for deduction of such tax; or
  • Signed by the taxpayer accompanied by proof of tax payment and/or proof of deduction.

Important Notes-

  1. For claiming the benefit of FTC in your Income tax returns, we must need to file the above-mentioned documents on or before the due date of filing of tax return specified under section 139(1) of the Income Tax Act, 1961.
  2. FTC shall not be available against payment of any interest, fee or penalty levied under the Income Tax Act, 191.

Therefore, if anyone has paid the tax in a foreign country and also paying the same in India also, it is better to immediately file Form 67 online on the Income-tax e filing portal and claim the credit of the same in our tax returns.

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