The tax information below is an extremely brief summary for standard situations of the referred relationship, and each situation may of course be different from the norm and have its own specificities.
A more comprehensive set of information for this country and each work relationship is available on Easop.
Employee via EoR
✅ Yes, you can grant non-qualified stock-options (NSO) to contractors in India.
Note that granting stock options to contractors could increase the misclassification risk (i.e. the contractor relationship being requalified as an employer-employee relationship, with all tax consequences that can go with it). This will never be the only factor though, what counts primarily for determining the degree of misclassification risk are factors relating to the modalities of the services performed (control over the contractor’s work, exclusivity, term of the services, etc.).
There are several bureaucratic issues with stock options 👉 Stock Appreciation Rights (SARs) settled in cash, can sometimes be a more flexible and safer option, especially since no tax-favored scheme exists for NSOs in India.
In a nutshell, what does taxation look like?
- At grant 👉 No taxation.
- At exercise 👉 The spread (i.e. the difference between the fair market value of the shares at the time of exercise and the exercise price paid by the grantee) will likely be taxed as any business income. In India, the 409A valuation would normally need to be supplemented by another local valuation.
- At sale 👉 The sale gain (i.e. the difference between the sale price and the fair market value of the shares at the time of exercise) will likely be taxed as capital gain at the applicable rates. Rates may be reduced under certain conditions.