ESOP Tax Uncertainty Demands Budget 2026 Clarity for Firms
Overview
India's ESOP tax rules face critical uncertainty, impacting talent retention and corporate finances. Companies grapple with disallowed expenditure claims, while globally mobile employees endure inconsistent taxation. Budget 2026 is urged to resolve these disputes and provide much-needed clarity on stock option treatment.
ESOP tax treatment in India remains a persistent headache for companies and their employees, prompting urgent calls for clarity ahead of Budget 2026. The current ambiguity is fueling disputes and hindering the effective use of these vital talent retention tools, particularly within multinational corporate structures.
Corporate Deductions Under Fire
Companies often claim ESOP-related costs as legitimate business expenses under Section 37(1) of the Income-tax Act. However, tax authorities frequently reject these claims, labeling the costs as capital or notional. This is especially problematic for Indian subsidiaries of foreign parent companies, where tax officials argue that expenditure related to shares issued by the parent is not incurred by the subsidiary. Deloitte India partners Rohinton Sidhwa and Amit Bablani highlight that these deductions are often denied despite clear commercial substance, contrary to accounting standards.
They advocate for treating amounts paid by Indian subsidiaries to foreign parents for stock-based compensation as bona fide revenue expenditure. This deduction, they argue, should align with accounting norms, crystallizing when the liability arises or upon actual payment. Implementing clearer valuation norms for overseas entities and offering fast-track dispute resolution could significantly reduce litigation. A checklist of substantiating documents could also streamline the process.
Global Employee Tax Woes
For employees, especially those working across borders, the challenges are equally stark. Section 17(2) of the Income-tax Act taxes ESOPs as perquisites at the time of exercise. This system falters for globally mobile individuals who may have serviced the company in multiple countries during the grant-to-vesting period. The lack of statutory apportionment rules leads to inconsistent assessments by tax officers, causing hardship.
Divya Baweja, a partner at Deloitte India, emphasizes the need for the Central Board of Direct Taxes (CBDT) to issue explicit guidelines. These should standardize the apportionment of ESOP taxation based on services rendered in different locations during the grant-to-vesting period. Stipulating clear documentation requirements will ensure consistency and minimize contentious disputes.
