I had a very basic doubt. For people who've exercised their stock options or have had some similar experience with this in the past, what's best way to limit the tax liability?
My company is registered in the US - would i have to pay taxes to both the governments?
Thanks in advance and have a great day ahead!
At the time of logging into the RSU portal or accepting RSU grant, you would have signed a tax agreement. You should be taxed accordingly. Most probably it will be just paying taxes to the indian govt.
If your company is listed and thus you have RSUs, then it will work out as below. I don't have an idea about ESOPs of unlisted companies.
When the RSUs vest, they get converted to actual shares and go into a demat account (managed by whatever portal your company uses to manage RSUs). The difference between the fair value of the share and the option exercise price will show up as a perquisite in your payslip and will form part of taxable income.
Example: if the fair value of share is $100 and exercise price was $0.05 then $99.95 is perquisite. Say you are in the 30% tax bracket, then you need to pay about $30 per share as tax. Your company might do this in two ways: 1. deduct the tax from your cash salary and you get all the vested shares in demat OR 2. the more likely option where some of the vested shares will be sold off to cover the tax liability and you get the remaining in demat account.
You can hold the shares in your demat account as long as you want (even after leaving the company). Whenever you sell them off, a second capital gains tax liability will come up. Say you sell the share at $150, then the difference from the fair value at which you received the share i.e. $50 in this case is the capital gain per share. At the time of filing an IT return you will need to show the capital gain. Long term/Short term capital gains logic is a bit different for shares listed outside india and shares on which STT is not paid so google that. Also for shares held for companies outside India, there is a separate section in ITR where you need to declare the shares you are holding.
Thanks, this is helpful 🤌🏻
Don't exercise your stock options if you are not confident about the growth of your company since you will have to pay tax on paper money, not a share that you can actually sell right away. ESOP taxation at the time of exercise works exactly the same way as RSU grants of a listed company in the US. The advantage of exercising your ESOPs before listing in a growth company is that, when it gets listed and if you want to sell, the LTCG time lapse is counted from the time of exercise. You don't have to pay tax to both the governments. You will have to pay only the Indian government if you are earning in India.
Got it. My company is at series A stage currently. Is it safe to say I won't cash out before the ipo?
Companies can also offer to buy a portion of your vested options before listing. 100% cash out you can get only during IPO. If you are confident about the product really adding value to customers (you will need to have enough experience to judge this accurately), your founders having 20+ years of experience with good networks/sales team, you can exercise now. Else don't.
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