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By the NRIWallah team · Last reviewed: August 2026

The ITAT ESOP Ruling — What It Fixes, and What It Doesn’t

A tribunal has confirmed a tax office cannot use your ESOP exercise price as cost basis once the appreciation was already taxed as salary. It’s real relief — but it’s one bench’s ruling, not a rewritten law.

Common Questions

The Mumbai bench of the Income Tax Appellate Tribunal ruled, in an order dated 31 July 2026, that a taxpayer who exercised ESOPs of an Indian company and later sold the shares as an NRI could use the fair market value (FMV) on the exercise date — not the original exercise price — as the cost of acquisition when computing capital gains under Section 49(2AA). The tax officer had tried to use the lower exercise price instead, which would have taxed the same share appreciation twice.
ESOPs are taxed in two separate stages. When you exercise the option, the difference between the share’s FMV on that date and the price you paid is taxed immediately as a salary perquisite under Section 17(2)(vi). When you later sell the shares, capital gains tax applies on the sale price minus the cost of acquisition. Section 49(2AA) sets that cost of acquisition at the same FMV already taxed as perquisite — specifically so that appreciation isn’t taxed once as salary and again as capital gains. If a tax officer instead uses the original exercise price as cost basis, that entire FMV-minus-exercise-price amount gets pulled back into the capital gains computation a second time.
In this case, the taxpayer had exercised the ESOPs after relocating and paid tax on the perquisite abroad rather than in India. The assessing officer argued Section 49(2AA) shouldn’t apply because the perquisite wasn’t taxed in India specifically. The tribunal rejected that reasoning, holding that the section’s applicability doesn’t depend on which jurisdiction taxed the perquisite, and additionally cited the non-discrimination clause in the India-UK tax treaty — denying an NRI the same cost-basis treatment a resident would get would itself be discriminatory.
As supporting precedent, yes — as a guarantee, no. An ITAT ruling is a tribunal decision, not a change to the statute or a CBDT circular. It’s persuasive for other benches facing similar facts, and something your CA can cite if a tax officer raises the same objection, but it isn’t automatically binding on every assessing officer, and there’s no news yet of whether the tax department will appeal it. It’s also not the only ESOP cost-basis case around — a separate ITAT Hyderabad ruling went against a taxpayer who held ESOPs in a foreign parent company, because a different provision (Section 49(2AB), tied to employer-paid Fringe Benefit Tax) applied to those facts instead. Which section governs your situation depends on the specifics.
If you exercised ESOPs of an Indian company — while resident in India or after moving abroad — paid perquisite tax on the exercise-date spread at the time (in India or in your country of residence), and have since sold or are planning to sell the shares, confirm with a CA that your capital gains computation uses FMV on the exercise date as cost of acquisition, not the exercise price. If a return has already been filed using the exercise price, or an assessment has added back the difference, this ruling is worth raising directly.

Related NRI tax guides

UK NRI Tax Guide

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Moving Back to India

NRI Investment Guide

A Ruling That Closes a Real Gap, Carefully

Plenty of NRIs left Indian employers holding stock options — exercised while still in India, or exercised later on an Indian company’s cap table after moving abroad. Years on, when those shares finally get sold, the capital gains computation hinges on a single number: what counts as the cost of acquisition. Get it wrong, and a tax office can end up taxing the same rupee of gain twice — once as salary when the option was exercised, once as capital gains when the shares were sold.

That’s exactly the dispute a Mumbai bench of the Income Tax Appellate Tribunal settled on 31 July 2026, in a case involving an NRI who had worked for the UK branch of an Indian IT company. He had exercised ESOPs, paid tax on the exercise-date appreciation as a perquisite — in his case, in the UK rather than India — and then computed his eventual capital gains using the fair market value on the exercise date as his cost basis. The assessing officer disagreed, argued the perquisite hadn’t been taxed in India, and used the original exercise price instead — adding back roughly ₹29.6 lakh as short-term capital gains on the difference.

The Mechanics Worth Understanding

ESOPs are taxed in two distinct events, and the whole dispute sits in the join between them. Exercise your option, and the gap between the share’s fair market value that day and what you paid for it is taxed immediately as salary income under Section 17(2)(vi) — regardless of whether you go on to sell the shares that year, next year, or a decade later. Sell the shares eventually, and ordinary capital gains rules apply: sale price minus cost of acquisition.

Section 49(2AA) is the provision that stops those two events from taxing the same money twice. It fixes the cost of acquisition for the later sale at the same FMV figure that was already brought to tax as a perquisite. Use the lower exercise price instead, and the entire FMV-minus-exercise-price spread — already taxed once as salary — gets swept back into the capital gains number and taxed a second time.

Where the NRI Angle Came In

The assessing officer’s argument in this case was a technicality: since the perquisite had been taxed abroad rather than in India, Section 49(2AA) — an Indian tax provision — shouldn’t apply to import that FMV figure. The tribunal rejected it outright, holding that the section’s applicability doesn’t turn on which country taxed the perquisite, and reinforced the point by invoking the non-discrimination clause in the India-UK tax treaty — an NRI can’t be denied the cost-basis treatment a resident taxpayer would get simply for having relocated.

What This Doesn’t Settle

It’s worth being precise about what an ITAT ruling actually is. It’s a tribunal decision binding on the parties in that specific case — genuinely useful as persuasive precedent if your CA is arguing the same point against a tax officer, but not a rewrite of the statute, and not something every assessing officer is obligated to follow. Tax departments routinely appeal favourable rulings to the High Court, and there’s no indication yet either way on this one.

It also isn’t a blanket rule for every ESOP scenario. A separate ITAT Hyderabad ruling went the other way for a taxpayer holding ESOPs in a foreign parent company, because a different provision — Section 49(2AB), tied to whether the employer paid Fringe Benefit Tax — governed those facts instead of Section 49(2AA). Which section applies depends on whose shares they are and how the perquisite was originally taxed, so this ruling supports NRIs with Indian-company ESOPs specifically, not ESOP taxation in general.

If you exercised ESOPs of an Indian company, already paid tax on the exercise-date spread, and are sitting on shares you plan to sell — or have already filed a return using the exercise price as cost basis — this is worth a direct conversation with a CA rather than something to file away as settled law.

NRIWallah does not provide tax or legal advice. This explainer reflects reporting on an ITAT Mumbai order dated 31 July 2026 as covered by Taxscan and other tax-law publications; the full judgment text was not independently verified. Confirm your specific position with a qualified chartered accountant before relying on this ruling.

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