The moment a foreign company hires its fifth engineer in Bengaluru, someone in the HR channel asks whether the India team can be put on the same global option pool as everyone else. The answer is yes — and almost every company gets there without incident. What they get wrong is everything that happens afterwards: a half-yearly RBI filing nobody knew existed, a payroll withholding obligation that lands on the Indian entity rather than the parent, and a foreign-asset disclosure in each employee's tax return that carries penalties out of all proportion to the size of the grant.

This is the compliance layer that sits quietly under a routine benefits decision. Here is what it actually looks like.

What the regulation actually says

The first thing to fix is a common misclassification. When a foreign parent grants its own shares to an employee sitting in India, that is not foreign direct investment into India. No money is coming in; an Indian resident is acquiring a foreign asset. The transaction is governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022 and the corresponding Overseas Investment Regulations, 2022, not by the Non-Debt Instruments Rules that govern inbound FDI.

Under Rule 15 of the OI Rules, 2022, a resident individual acquiring equity capital of a foreign entity under an employee stock option scheme is making Overseas Portfolio Investment (OPI) where the holding is below ten per cent of the paid-up capital and does not carry control. Two features of this route matter commercially:

It is an automatic-route transaction. No prior RBI or government approval is required, provided the scheme is offered by the foreign entity globally on a uniform basis to its employees and directors, including those of its Indian office, branch or subsidiary. "Uniform basis" is the operative condition — a plan carved out only for India, on materially different terms, falls outside the concession and needs to be re-examined.

The LRS interaction is narrower than most people assume. The Liberalised Remittance Scheme cap of USD 250,000 per financial year bites only when the employee actually remits money out of India to pay the exercise price. Where the grant is cashless, net-settled, or where shares vest without any outward payment, no LRS drawdown occurs. Where the employee wires funds abroad to exercise, that remittance is an LRS transaction and consumes the annual limit.

The reverse direction is worth separating cleanly, because the two get conflated. If the Indian subsidiary issues its own shares or options to non-resident employees or directors, that is FDI. It is permitted under the automatic route under Rule 8 of the NDI Rules, 2019, provided the applicable sectoral cap and entry conditions are met and the scheme complies with Section 62(1)(b) of the Companies Act, 2013. It moves to the government approval route where the beneficiary is a citizen of, or resident in, a country sharing a land border with India — the Press Note 3 restriction applies to option grants just as it applies to a share subscription. Issuance is reported in Form ESOP within 30 days of allotment, and where options are later exercised into shares against consideration, Form FC-GPR obligations can also be triggered.

Filing obligation on the Indian entity. This is the one that is missed most often. Under the OI Rules, the Indian office, branch or subsidiary of the foreign granting entity — not the individual employee — must report the OPI in Form OPI to its authorised dealer (AD) bank within 60 days from the end of the half-year, that is, by end-November for the half-year ending 30 September and by end-May for the half-year ending 31 March. The reporting is done on the RBI's OID/FIRMS reporting infrastructure through the AD bank.

Repatriation on exit. Where the employee sells the foreign shares, sale proceeds must be repatriated to India within 90 days of receipt. Parking proceeds in an overseas brokerage account indefinitely is a contravention, not a timing preference.

Tax at exercise, not at grant. Under Section 17(2)(vi) of the Income-tax Act, 1961, the taxable perquisite arises on the date of exercise, not grant and not vesting. The amount is the fair market value of the share on the exercise date less the price actually paid by the employee. Because the shares are of a foreign company and are not listed on a recognised stock exchange in India, FMV is determined under Rule 3(8) of the Income-tax Rules by a SEBI-registered merchant banker, valued as on the exercise date or a date not more than 180 days earlier. The withholding obligation under Section 192 falls on the Indian employer, because the perquisite is treated as salary paid by the Indian entity on behalf of the group.

Tax again at sale. Disposal produces capital gains. For Indian tax purposes, shares of a foreign company are treated as unlisted securities: the holding period threshold is 24 months, above which gains are long-term and taxed at 12.5 per cent without indexation following the Finance (No. 2) Act, 2024. Below 24 months, gains are short-term and taxed at the individual's slab rate. Any foreign tax paid may be creditable under the relevant Double Taxation Avoidance Agreement, subject to filing Form 67.

Practical implications: what goes wrong

The half-yearly Form OPI is never filed. In most groups, equity administration sits with the parent's finance team and payroll sits with the Indian entity, and the RBI filing belongs to neither by default. Contraventions under FEMA are curable through compounding under Section 15, but compounding requires an application, a fee, and a disclosed history of non-compliance — which then surfaces in every subsequent due diligence exercise. Buyers price this in.

Withholding is missed on exercise. Because no cash moves through Indian payroll when options are exercised abroad, the perquisite frequently escapes the payroll system entirely. The Indian entity remains liable for the shortfall along with interest under Section 201(1A), and disallowances follow. The practical fix is to treat exercise events as a payroll input feed, not as an equity-administration output.

Schedule FA is left blank. Every resident holding foreign shares must disclose them in Schedule FA of the income tax return, irrespective of whether any income arose. Non-disclosure sits under the Black Money (Undisclosed Foreign Income and Assets) Act, 2015, which carries a penalty of ₹10 lakh — although, following the Finance Act, 2024, that penalty is not levied where the aggregate value of the undisclosed foreign assets (other than immovable property) does not exceed ₹20 lakh. Employees rarely know this obligation exists. Telling them is cheap; the alternative is not.

No cross-charge, no deduction. Where the parent bears the ESOP cost and never recharges the Indian subsidiary, the subsidiary generally cannot claim the discount as a deduction. Where it is recharged, Indian courts — most prominently the Karnataka High Court in the Biocon line of reasoning — have accepted ESOP cost as allowable business expenditure. The recharge is a current account transaction and remittable, but it is also a related-party transaction and must be supported by transfer pricing documentation and reported in Form 3CEB.

Step-by-step: what to do

Confirm the scheme is globally uniform. Review the plan document to verify that Indian participants are offered options on the same basis as employees elsewhere. If India-only terms exist, take a documented FEMA view before the first grant.
Appoint the AD bank as the reporting channel. Notify your existing AD bank that the Indian entity will file Form OPI on behalf of resident participants, and confirm their internal documentation checklist in advance of the first half-year.
Build a grant and exercise register. Maintain, per employee: grant date, vesting schedule, exercise date, exercise price, shares acquired, and whether exercise was cash or cashless. This register is the single source for both the FEMA filing and payroll withholding.
Calendar the Form OPI filing. Two dates a year — end-November and end-May — covering the half-years ended 30 September and 31 March respectively.
Commission a merchant banker valuation before each exercise window. Rule 3(8) permits a valuation dated up to 180 days before exercise, so one valuation can serve a defined window if exercises are batched.
Feed the perquisite into Indian payroll in the month of exercise and withhold under Section 192. Issue Form 16 reflecting the perquisite.
Put the cross-charge agreement in writing before the first recharge, price it on a defensible transfer pricing basis, and capture it in Form 3CEB.
Brief employees on Schedule FA and the 90-day repatriation rule at grant, in writing. Repeat it at exercise.
Where the Indian entity issues its own options to non-residents, check Press Note 3 applicability first, then file Form ESOP within 30 days of allotment.

FAQ

Does an ESOP grant from a foreign parent use up an employee's USD 250,000 LRS limit?
Only to the extent money is actually remitted out of India to pay the exercise price. Cashless or net-settled exercises involve no outward remittance and therefore no LRS drawdown.

Who files the RBI return — the employee or the company?
The Indian office, branch or subsidiary of the foreign granting entity files Form OPI through its AD bank, within 60 days of each half-year end. It is not an individual filing.

Is tax payable when options vest?
No. The perquisite crystallises on exercise under Section 17(2)(vi), based on the merchant-banker-determined FMV on that date less the price paid. Vesting alone is not a taxable event.

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