ESOPs from an Indian employer when you are a US tax resident

Many Indian-origin professionals hold employee stock options (ESOPs) in an Indian company, listed or a startup, from an earlier job. This guide explains how the US usually treats those options, how that differs from India, and which reporting forms may come into play. It is general information, and ESOP outcomes depend heavily on the exact plan documents.

Start with what kind of option you hold

The US has special categories such as incentive stock options (ISOs) and employee stock purchase plans (ESPPs), covered in our guide on RSUs, ESPPs and ISOs. An Indian company plan is not built to those US rules, so in practice you should expect it to be treated as a nonstatutory option. That means the ISO and ESPP rules generally do not apply to you. IRS Publication 525 notes that your employer can tell you which kind of option you hold, so ask for it in writing.

US timing: grant, vesting, exercise

For a nonstatutory option, IRS Publication 525 (2025 edition) draws one main line. If the option has a readily determinable fair value when granted, it is taxed like other property received for services. The Publication says that value exists if the option is actively traded on an established market. An Indian ESOP is normally not transferable and not traded, so it usually has no readily determinable value. In that case:

• Grant: no US income.
• Vesting: for a plain option, no US income. Vesting by itself is not the taxable event.
• Exercise: the restricted property rules apply. If the shares you receive are fully vested, you generally have compensation income equal to the fair market value at exercise minus what you paid.
• Sale: capital gain or loss. Your basis is what you paid plus the amount you included in income.

The Publication also says you cannot make the section 83(b) election on the option itself. It can be relevant if the plan lets you exercise early into shares that are still subject to forfeiture. Then the election can pull the tax forward to the transfer date, and the Publication says the statement must be made no later than 30 days after that date. Whether that suits you is a judgement call for a US CPA.

India's timing is different

India generally taxes the benefit at exercise as a salary perquisite (section 17(2)(vi) of the Income-tax Act, 1961), and then taxes capital gains when you sell. The Income-tax Act, 2025 applies from 1 April 2026. We have not confirmed its section numbers for this rule, so ask your CA for the current reference. Eligible startups may have special tax deferral rules for the employee, so check your grant letter.

So the two countries may tax the same spread in different years. Example: you exercise early into shares that are not yet vested. India may tax at exercise. The US may wait until the shares vest, unless you made a timely 83(b) election. The reverse can also happen.

Foreign tax credit and sourcing

Indian tax you pay may be claimed on Form 1116, but only against US tax on the same income and in the right category. Under the 2025 Form 1116 instructions, pay for services is generally sourced where the work was done, and split on a time basis for mixed periods. If you worked in India during vesting and then moved to the US, only part of the spread may be Indian-source, so part of the Indian tax may not be creditable. See foreign tax credit and the India-US treaty.

Is your company a PFIC or a CFC?

For private Indian companies, two regimes need a quick check once you own actual shares.

• PFIC (Form 8621): a foreign company is a PFIC if 75% or more of its gross income is passive, or at least 50% of its assets produce or are held to produce passive income (Form 8621 instructions, revised 12/2025). A cash-rich company with little revenue can be close to this line. The instructions have a $25,000 reporting exception ($50,000 for joint filers) for some shareholders, but only in limited cases. Our guide on Indian shares and mutual funds explains the consequences.
• CFC (Form 5471): a foreign company is a CFC if US shareholders (each owning 10% or more by vote or value) together own more than 50% (Form 5471 instructions, revised 12/2025). A startup with US-person founders or investors can meet this. A small employee holding rarely makes a company a CFC alone, but you can still have a filing duty if you own 10% or more. See Indian business shares and Forms 5471 and 8865.

Do not assume either regime applies or does not apply. Both turn on facts about the company's income, assets and ownership, which you may not see.

Reporting: Form 8938 and FBAR

Stock issued by a foreign company and held outside a financial account is a specified foreign financial asset for Form 8938. The IRS comparison table says such stock is not reported on the FBAR. The Form 8938 thresholds for a taxpayer living in the US are $50,000 at year end or $75,000 at any time if unmarried, and $100,000 or $150,000 if married filing jointly (instructions revised November 2021). The instructions treat property received for services as held from the date it is substantially vested, or from transfer if you made a valid 83(b) election. They do not clearly address an unexercised option, so ask a CPA how to treat it.

If your shares are credited to an Indian demat or brokerage account, that account is itself a foreign financial account and may be FBAR-reportable. See FBAR and Form 8938 for Indian accounts.

Keep these records

1. The grant letter and the plan rules.
2. The vesting schedule and the date of each vest.
3. Valuation reports (a merchant banker valuation for unlisted shares is common in India).
4. Exercise notices, payment proof and the Indian perquisite statement or payslip.
5. Proof of Indian tax paid, such as TDS certificates.
6. Exchange rates used on each date. See Form 8949 with rupee basis.

A US CPA should be involved before you exercise, not after. Exercise date, a possible 83(b) election, credit sourcing, PFIC or CFC status and Form 8938 value all depend on facts and need to be modelled together with your Indian CA.