Equity compensation has become a key component of remuneration for professionals working with multinational companies and US startups. Among these, Non-Qualified Stock Options (NSOs) are widely used—but their taxation is complex for NRIs due to dual-country tax implications.
Without proper planning, NSOs can result in unexpected tax costs, double taxation, and compliance risks in both the US and India.
What are NSOs?
A Non-Qualified Stock Option (NSO) gives an employee or consultant the right to purchase company shares at a fixed exercise price within a specified period.Unlike Incentive Stock Options (ISOs), NSOs do not receive special tax benefits under US law.
How NSOs are Taxed (Brief Overview)
US Taxation
At Exercise:
- Taxable as ordinary income = FMV – Exercise Price
- Reported on Form W-2 (employees) / Form 1099 (consultants)
At Sale:
- Short-term or long-term capital gains based on holding period after exercise.
India Taxation
Taxation depends on your residential status:
At Exercise (if Resident/RNOR/ROR):
- Treated as salary perquisite in India
- Taxable at slab rates (FMV – Exercise Price)
At Sale:
- Capital gains tax applies
- Cost of acquisition = FMV at exercise
| Status | Tax Exposure in India |
| NRI | Limited / source-based |
| RNOR | Partial global income |
| ROR | Full global income taxable |
Timing your exercise and sale around the RNOR → ROR transition is a key tax planning strategy.
India–US DTAA & Foreign Tax Credit (FTC)
NRIs may face tax in both countries. Relief is available under the India–US DTAA through Foreign Tax Credit (FTC), subject to:
- Correct reporting in ITR
- Filing Form 67
- Proper documentation of US taxes paid
Mandatory Reporting for NRIs
NRIs and returning Indians must disclose:
- Foreign shares/stock options in Schedule FA
- NSO perquisite income (if applicable)
- Capital gains on sale of shares
Non-disclosure can lead to notices and penalties.
Common Mistakes to Avoid
- Exercising NSOs without considering residency impact
- Ignoring Indian perquisite tax
- Missing FTC claims
- Poor documentation of FMV and exercise dates
How R. Tulsian & Co. LLP Can Help
R. Tulsian & Co. LLP assists NRIs with:
- NSO, ISO, and RSU taxation
- India–US DTAA and FTC planning
- RNOR/ROR transition advisory
- Cross-border tax compliance and reporting
FAQs – Non-Qualified Stock Options (NSOs) for NRIs
1. What are NSOs?
NSOs give you the right to buy company shares at a fixed price; they do not have special US tax benefits like ISOs.
2. When are NSOs taxed in the US?
- At exercise: FMV – exercise price is taxed as ordinary income.
- At sale: Capital gains tax applies based on holding period.
3. Are NSOs taxable in India for NRIs?
Yes — taxation depends on your residential status (NRI/RNOR/ROR). RORs are taxed on global income.
4. Can I claim relief under India–US DTAA?
Yes, you can claim Foreign Tax Credit (FTC) by filing Form 67 with proper documentation.
5. How can R. Tulsian & Co. LLP help?
We assist with NSO taxation, DTAA/FTC planning, RNOR–ROR transition advisory, and cross-border compliance.
Conclusion
NSOs can be highly rewarding—but only with careful cross-border tax planning. Professional guidance can help optimise tax, avoid double taxation, and ensure full compliance.
For expert guidance on cross-border taxation, visit www.rtulsian.com or reach out to us on ishan@rtulsian.com or WhatsApp us on +91 6289107303 for a personalized consultation and seamless tax compliance solutions.
