ESOPs will be taxed on two instances:
i. At time of exercising the option
ii. At time of selling the exercised shares
At the time of exercising options:
Tax in India: The difference between exercise price and fair market value as on date of exercising the option will be taxed as perquisite under head ‘Income from Salaries’ in the hands of the employee.
Tax in the US: In the US too, like in India, value of ESOPs granted being the difference between the fair market value and exercise price on the date of exercising the option is taxed at the time when the employee exercises the option.
At the time of selling the exercised options:
Tax in India: In India, capital gain on ESOPs is calculated by arriving at the difference between sale value and market value as on the date of exercising ESOP. The logic being that the employee has already paid the tax on the difference between the exercise price and the market value as on date of exercise so he must now pay tax only on the excess.
Tax in the US: The method of calculating capital gains is the same in the US as in India.
Further, the employee will be eligible to claim credit of taxes paid in India against taxes payable in the US by resorting to the DTAA between the two countries.