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All NRIs

The ITAT ESOP ruling: what it fixes and what it does not

A tribunal has held that a tax officer cannot use your exercise price as cost once the gain on exercise was already taxed as salary, but it is one bench’s ruling and not a change in the law.

Editorial illustration of a share certificate crossing between salary-tax and capital-gains ledgers

NRIWallah team

Updated October 2026 · 3 min read

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A gap in the ESOP rules

Many NRIs left Indian employers holding stock options, exercised either while still in India or later on an Indian company’s cap table after moving abroad. When the shares are finally sold, the capital gains computation depends on one number: the cost of acquisition. If it is wrong, the same rupee of gain can be taxed twice, once as salary when the option was exercised and once as capital gains on sale.

A Mumbai bench of the Income Tax Appellate Tribunal dealt with exactly this in an order dated 31 July 2026. The taxpayer was an NRI who had worked for the UK branch of an Indian IT company. He exercised ESOPs, paid tax on the exercise-date appreciation as a perquisite in the UK rather than India, and computed his capital gains using the fair market value (FMV) on the exercise date as his cost. The assessing officer argued that the perquisite had not been taxed in India, used the exercise price instead and added back about ₹29.6 lakh as short-term capital gains.

How the two taxes fit together

ESOPs are taxed in two stages. When you exercise, the gap between the share’s FMV that day and the price you paid is taxed as salary under section 17(2)(vi), whether you sell the shares that year or a decade later. When you sell, capital gains tax applies to the sale price minus the cost of acquisition.

Section 49(2AA) stops the same money being taxed twice by setting the cost of acquisition at the FMV already taxed as a perquisite. If the officer uses the lower exercise price instead, the whole spread between FMV and exercise price returns to the capital gains figure and is taxed again. These are the section numbers of the 1961 Act, which applied to this case.

The NRI argument

The assessing officer argued that section 49(2AA) could not apply because the perquisite was taxed abroad. The tribunal rejected that. It held that the section does not depend on which country taxed the perquisite. It also pointed to the non-discrimination article of the India-UK tax treaty, since an NRI cannot be denied the cost treatment a resident would get because they relocated.

What the ruling does not settle

An ITAT ruling binds the parties in that case. It is useful persuasive precedent if your CA is arguing the same point, but it does not rewrite the statute, and officers are not obliged to follow it. Tax departments often appeal favourable rulings to the High Court, and we do not know whether this one will be appealed.

It also supports NRIs with Indian-company ESOPs specifically. Other facts, such as shares in a foreign parent company, can be governed by different provisions. If you exercised an Indian company’s ESOPs, paid tax on the exercise-date spread and plan to sell, or have filed using the exercise price, speak to a CA. Treat the ruling as an argument to make, not settled law. The UK NRI tax guide covers how Indian income is taxed in the UK. The moving back to India guide covers what else changes if you plan to return.

NRIWallah does not provide tax or legal advice. This explainer reflects reporting on the ITAT Mumbai order dated 31 July 2026. We did not review the full judgment text. Confirm your position with a chartered accountant before relying on the ruling.

Common questions

As supporting precedent, yes, and as a guarantee, no. An ITAT order is a tribunal decision, not a change to the statute or a CBDT circular. It is persuasive for other benches facing similar facts and something your CA can cite if an officer raises the same objection, but it does not bind every assessing officer. The department can also appeal. Which provision governs your case depends on whose shares they are and how the perquisite was taxed.
If you exercised ESOPs of an Indian company, whether in India or after moving abroad, paid tax on the exercise-date spread at the time (in India or where you live) and have sold or plan to sell the shares, confirm with a CA that your capital gains computation uses the fair market value on the exercise date as the cost of acquisition. If a return was filed using the exercise price, or an assessment added the difference back, this ruling is worth raising directly.

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