Can NRIs exercising ESOPs abroad still owe tax in India? A Rs 20.45 lakh ruling clarifies the law

Employee Stock Option Plans (ESOPs) have long been seen as a powerful compensation tool, giving employees a stake in their company's growth. But a recent case involving an HDFC Bank employee working in Dubai shows how cross-border taxation can complicate what might seem like a straightforward benefit.

An ESOP allows a company to set aside a portion of its equity for employees, who receive the right—though not the obligation—to buy shares at a predetermined “exercise price” after they complete a vesting period. Once vested, employees may purchase these shares and either hold them or sell them for profit, with any gains treated as income or capital gains depending on the stage of sale. For workers, ESOPs often form a significant part of long-term wealth creation, while companies use them to drive retention, motivation and alignment with business growth.

However, the tax treatment of ESOPs becomes complex when employees move across borders. Tax advisory platform Tax Buddy recently highlighted the case of Krishna, an HDFC Bank employee who found himself in the middle of a taxation dispute after exercising ESOPs while living outside India. Despite arguing that his stock option income should be exempt in India as he was a UAE resident at the time of exercise, the tax authorities ruled otherwise—and the Tribunal upheld the decision, resulting in a tax liability of ₹20.45 lakh.

The case

Krishna worked at HDFC Bank in Mumbai in 2007 and received 18,500 ESOPs at an exercise price of ₹219.74 as part of his India-based compensation package. Later that year, on October 1, 2007, he moved to Dubai for work. His ESOPs vested in 2008–09 and he exercised them several years later in FY 2012–13, by which time he was a tax resident of the UAE.

He claimed that because the exercise took place while he lived and worked in Dubai, the income should be treated as UAE-sourced salary. He further invoked Section 90 relief under the India–UAE Double Taxation Avoidance Agreement (DTAA), arguing that the ESOP benefit corresponded to employment exercised in the UAE.

What the Tax Department said

The Assessing Officer rejected this claim. The AO held that:

The ESOPs were granted in 2007 for services rendered in India.

Therefore, the source of income was India, regardless of where Krishna lived during the exercise year.

Section 17 of the Income-tax Act governs the timing of taxation, not the place of accrual.

Residency in the UAE at the time of exercise does not alter the source of income.

As a result, the ESOP benefit was deemed fully taxable in India.

Tribunal’s ruling

The Tribunal sided with the AO on all major points. It held that ESOP income arises from employment exercised during the grant period—not from where the employee lives when the option is exercised. Because Krishna performed qualifying employment in India at the time the options were granted, India retained full taxing rights.

The appeal was dismissed, and the Rs 20.45 lakh tax demand stood.

Key takeaway

The ruling underscores an important principle: ESOP taxation depends on the jurisdiction where the employee worked during the grant period. For globally mobile professionals, this means:

If ESOPs are granted while working in India, India can tax them—even if exercised after moving abroad.

If the grant or vesting period spans multiple countries, tax liability may be split proportionately.

Employees must evaluate residency rules, DTAA provisions and grant timelines before exercising options.

As companies become more global and employees increasingly shift across borders, understanding the tax nuances of ESOPs is critical to avoiding costly surprises—like Krishna’s ₹20 lakh bill.