A Complete Law, Interpretation, ESOP–RSU Treatment & Capital Gains Framework for AY 2025–26 & AY 2026–27
By CA Surekha S Ahuja
WHY AMAZON SHARES ARE “UNLISTED SECURITIES” FOR INDIAN TAX PURPOSES
Even though Amazon is listed on NASDAQ, for Indian tax law the shares are unlisted securities because listing must be on a recognised stock exchange in India (Section 2(47A), read with Rule 2(f) of SCRR).
This classification applies irrespective of how the shares were acquired:
-
ESOP Exercise
-
RSU Vesting
-
Direct Purchase through broker
-
Employee Stock Purchase Plan (ESPP)
-
Transfer from another person
All lead to the same capital gains treatment on eventual sale.
WHY RESIDENCY STATUS CONTROLS THE TAXATION OUTCOME
Resident (ROR): Taxable on Global Income
(Section 5(1)(c))
→ Gains from Amazon share sale are fully taxable in India.
RNOR / Non-Resident: Only Indian-sourced income taxable
(Section 5(2) + Section 9(1))
→ Sale of foreign shares without Indian nexus is NOT taxable in India.
DTAA (India–USA) Article 13
Assigns capital gains taxation exclusively to country of residence, unless property-linked companies are involved.
→ Again, no Indian tax for NRIs/RNOR.
HOLDING PERIOD FOR LTCG — SAME FOR ESOPs, RSUs & DIRECT SHARES
Under Section 2(29A):
For unlisted shares (Indian or foreign), LTCG arises when held > 24 months.
| Acquisition Method | Cost Basis Date | Holding Period Starts From |
|---|---|---|
| ESOP | Exercise date | Date of allotment on exercise |
| RSU | Vesting date | Date shares are transferred to employee |
| ESPP | Purchase date | Date shares are recorded in account |
| Direct Purchase | Purchase date | Date of trade/settlement |
This distinction is critical because ESOP/RSU vesting is NOT the purchase date.
HOW ESOPs & RSUs CREATE TWO LEVELS OF TAX FOR RESIDENTS
A. Level 1 – Salary Tax on Allotment
Applicable only to Residents and RNOR
(Section 17(2)(vi), Rule 3(8))
At the time of ESOP exercise or RSU vesting:
Perquisite = FMV on exercise/vesting – Exercise Price (if any)
Taxed as salary at slab rates.
For NRIs
If they were non-resident at the time of vesting/exercise, and services were rendered abroad:
→ No Indian salary taxation.
B. Level 2 – Capital Gains on Sale
Same computation for ESOP/RSU/direct:
Sale Price (INR) – Indexed Cost (INR)
Important:
The FMV taxed as salary becomes the Cost of Acquisition for capital gains purposes
(Section 49(2AA) & CBDT Circular No. 9/2007).
Thus, ESOP/RSU taxation does not change LTCG mechanics — only the cost is different.
CAPITAL GAINS TAXATION ON SALE — RESIDENT VS NON-RESIDENT
5.1 Resident (ROR): Section 112(1)(a)
-
LTCG rate: 20% with indexation
-
Surcharge: Capped at 15%
-
Cess: 4%
-
STCG (≤ 24 months): Slab rate (0–30%), surcharge up to 37%
Indexation available irrespective of whether shares originated from:
-
ESOP
-
RSU
-
ESPP
-
Direct purchase
-
Gift/inheritance
RNOR / Non-Resident: NO CAPITAL GAINS TAX IN INDIA
| Item | Taxable in India? | Reason |
|---|---|---|
| ESOP vested abroad | ❌ No | Services rendered abroad; no accrual in India |
| RSU vested abroad | ❌ No | Not linked to India-sourced employment |
| Sale of Amazon shares | ❌ No | Foreign source; DTAA Article 13 |
Non-residents have zero India tax at both levels (salary + capital gains), provided the vesting/exercise relates to non-India service periods.
COST BASIS RULES — ESOPs & RSUs INTEGRATED
| Acquisition Route | Cost for Capital Gains |
|---|---|
| ESOP | FMV on exercise day (Rule 3(8)) |
| RSU | FMV on vesting day |
| ESPP | Actual purchase price + brokerage |
| Direct purchase | Actual purchase price |
| Gift | Previous owner's cost (Section 49(1)) |
| Inheritance | Previous owner's cost |
Indexation applies on the above cost.
FOREIGN CURRENCY TREATMENT — CRITICAL NUANCED DIFFERENCE
Residents
-
Must convert purchase cost to INR using RBI rate on acquisition
-
Convert sale proceeds using RBI rate on sale date
-
Indexation smooths inflation & INR depreciation impact
Non-Residents
-
If capital gains not taxable — no conversion required
-
No indexation concept
-
No Schedule FA reporting if not Resident
REPORTING REQUIREMENTS FOR RESIDENTS (MANDATORY)
ITR-2
-
Schedule CG
-
Schedule FA (Foreign Assets)
-
Schedule FSI & TR (if foreign tax credit claimed)
-
Income from ESOP/RSU in Schedule Salary
Audit / Valuation Notes to Maintain
-
Exercise/Vesting documentation
-
FMV valuation statement (Form 12BA disclosure by employer)
-
Brokerage, transaction statements
COMPLETE DIFFERENTIATION MATRIX — INCLUDING ESOP/RSU EFFECT
| Category | Resident (ROR) | RNOR | Non-Resident |
|---|---|---|---|
| Salary tax on ESOP/RSU vesting | Yes | Only for India-linked services | No |
| Tax on sale of Amazon shares | Yes | No | No |
| LTCG rate | 20% with indexation | Nil | Nil |
| STCG rate | Slab | Nil | Nil |
| Surcharge | Capped 15% for LTCG | Nil | Nil |
| Cost for CG | FMV (ESOP/RSU) or actual cost | Not relevant | Not relevant |
| FA Reporting | Yes | No | No |
MASTER SUMMARY — THE CORRECT LAW POSITION IN ONE SENTENCE
For Residents, Amazon ESOP/RSU/direct shares are taxed twice (salary at vesting/exercise + 20% indexed LTCG on sale); for Non-Residents and RNORs, Amazon share sale is not taxable in India and ESOP/RSU salary component is taxed only to the extent linked to India services.
