Firstly, who can receive NSOs?

Direct employees

YES

EOR employees

YES

CONTRACTORS

YES

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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.

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A more comprehensive set of information for this country and each work relationship is available on Easop.

General Taxation

Learn about equity schemes and taxation policies in

the

India 🇮🇳

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) is taxed as salary income.

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At sale 👉 the gain is taxed as either short term or long term capital gain.

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) is taxed as salary income.

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At sale 👉 the gain is taxed as either short term or long term capital gain.

Taxation differs depending on the contractor's status, but as rule
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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) is taxed as salary income.

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At sale 👉 the gain is taxed as either short term or long term capital gain.

Tax advantages

Learn about equity schemes and taxation policies in

the

India 🇮🇳

When the shares are held for more than 2 years, there’s a long term capital gain taxation (which is lower than the usual rate).

Tax deferral to time of sale only possible for companies qualifying as Indian start-ups.

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When the shares are held for more than 2 years, there’s a long term capital gain taxation (which is lower than the usual rate).

When the shares are held for more than 2 years, there’s a long term capital gain taxation (which is lower than the usual rate).

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Introduction

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A more comprehensive set of information for this country and each work relationship is available on Easop.

Regular employee

Employee via EoR

Contractor

✅ 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.

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Pay attention to:

⚠️ 409A valuations are not accepted to determine the fair market value of the shares (and taxable basis at exercise). Valuation by an Indian Category 1 Merchant Banker is mandatory.

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⚠️ Repatriation of sale proceeds required (employee’s personal obligation).

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⚠️ Alternatives to traditional stock options (such as phantom stock, VSOP or cash-settled stock appreciation rights) can be recommended.

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⚠️ Granting stock options as a foreign company to people in India without having a local presence through a branch or subsidiary comes with a few uncertainties and legal obstacles, regarding a.o. the possibility to hold shares in a foreign entity and sell these shares within a certain period after exercise.

⚠️ 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.).