Why the same vesting gets taxed twice
An ESOP can land in two tax systems at once because each country has a reason to tax it. India taxes the exercise as a salary perquisite under Section 17(2) — your Indian employer (or the Indian arm of a group) deducts TDS on it under Section 192 — because part of the service behind the options was rendered in India. Your country of residence taxes the same vesting because that's where you now live and, often, where you were working when it vested.
Neither country is wrong to look at it. The overlap arises because the income relates to a period that straddled both, and two systems are measuring the same slice. Left alone, you would pay close to full tax on it in each place — a real economic double hit, not a paperwork glitch.
The relief is built in two stages, and they run in order. First you source the income so each country only taxes its rightful part. Then, for any part both countries still reach, you take a credit for the foreign tax. The next two sections take them in turn.
Stage one: split the income by where you worked
Before any credit, the income is divided between the two countries by reference to where the service behind the options was actually performed. An ESOP rewards the work done between grant and vesting, so the natural split is by workdays in that window — India-workdays to India, foreign-workdays to the other country.
The treaty's employment-income article — the dependent personal services article, Article 15 in most of India's treaties and Article 16 in the India-US treaty — is the provision that justifies this. It assigns the right to tax employment income to the country where the employment was exercised, so the perquisite is apportioned rather than claimed in full by whichever country gets to it first.
| Where the work was done | Which country taxes that part |
|---|---|
| In India | India, as a Section 17(2) perquisite |
| In the foreign country | The foreign country |
| Genuinely both | Apportioned by workdays, then credited |
Getting this split right often removes most of the apparent double tax on its own: the slice your Indian payroll over-withheld on the foreign workdays isn't really India's to keep, and is reclaimed on the Indian return. What remains genuinely taxed by both — and there usually is some — is what the credit in stage two is for.
Stage two: the foreign tax credit (Form 67)
For the part that both countries still tax after sourcing, India gives a credit, not an exemption. India computes its own tax on the income, then lets you set the foreign tax already paid on that same income against the Indian tax, capped at the Indian rate on it (Section 90, read with the treaty).
The claim runs through Form 67, filed under Rule 128. You file it before you file your tax return — by the end of that assessment year, which for 2026-27 means 31 December 2026. You support it with proof of the foreign tax: the foreign payslip or withholding statement, the broker or employer tax document, or the foreign return showing the tax paid on that income.
Because it's a credit, the arithmetic nets out to the higher of the two countries' rates, paid once. If the foreign rate was higher, the Indian tax is largely wiped out by the credit; if India's rate was higher, you pay India the difference. Either way the same income is not taxed twice over — which is the whole point of running stage two after stage one.
The later sale: the same fix, a different article
The double-tax question can come back when you sell the shares, not just at exercise — and it's resolved the same way, through a different treaty article.
When you sell, the gain over the value already taxed at exercise is a capital gain. If you're India-resident in the year of sale, India taxes that gain; your other country may tax it too. The treaty's capital-gains article allocates the taxing right, and where both still tax the gain, the same foreign tax credit via Form 67 sets the foreign tax off against the Indian tax on it.
The one thing to keep straight is that the exercise and the sale are two different events under two different articles — employment income for the exercise, capital gains for the sale — so the credit is worked out separately for each, against the right foreign tax for each. Treating them as one lump is where the relief gets miscalculated.
Throughout, our role is the Indian computation, the sourcing and the Form 67 filing. The matching position on your foreign return — what you report there and what credit your country gives — is for your local tax preparer, so the two sides line up.
A worked example: Raghav, taxed in India and the US
Raghav was granted ESOPs by an Indian company, worked in its India office for the first part of the vesting period, then moved to the US on assignment and exercised a tranche there. The exercise perquisite is ₹20,00,000.
First, the sourcing. About half his grant-to-vesting workdays were in India, so roughly ₹10,00,000 is India-sourced salary under Section 17(2); the US-workday half is for the US to tax, under the dependent-personal-services article (Article 16) of the India-US treaty. His Indian employer had withheld Section 192 TDS on the full ₹20,00,000, so the tax on the US-workday half is reclaimed on his Indian return.
Second, the credit. Both countries still tax the income relating to his US presence around exercise, so for that overlap he files Form 67 — by 31 December 2026 for assessment year 2026-27 — and credits the US tax paid on that slice against the Indian tax on it, paying only the difference rather than both in full. When he sells the shares a year later while US-resident, the gain over the ₹20,00,000 exercise value is handled under the treaty's capital-gains article, with any further US tax credited again via Form 67. The figures are illustrative; the order — source first, credit second, exercise and sale kept separate — is what stops the same income being taxed twice.