Dividends on foreign shares issued under employee stock ownership plans (ESOPs) are increasingly leading to under-reporting of foreign income and assets in income tax returns, as many employees fail to recognise that automatically reinvested payouts are still taxable income, sources aware of the development said.
A recurring compliance issue has come to the notice of tax officials where employees of multinational companies holding shares of overseas parent entities do not report dividend income or additional share acquisitions arising from such reinvestments, they said.
“A recurring issue is arising with employees of multinational companies who receive stock options linked to foreign parent entities, including US companies. At the time of grant, tax is typically withheld because stock options are treated as a perquisite of employment. Perquisite of employment refers to a non-cash benefit provided by an employer, such as stock options, which is treated as part of an employee’s salary for tax purposes,” a source told Moneycontrol.
However, when employees later sell those shares or earn dividends, many fail to report that foreign income in their Indian tax returns,” the source said.
Foreign asset disclosure
Sources said such shares qualify as foreign assets, once the individual becomes a tax resident in India and must therefore be disclosed in the income tax return.
“For instance, if an engineer working in India holds shares of a foreign parent company, those shares fall within foreign asset reporting requirements, once the individual is a tax resident in India,” the source said.
Another frequent area of misreporting relates to dividends on foreign ESOP shares that are automatically reinvested to purchase additional stock instead of being credited to bank accounts.
“In many cases, dividends are not paid out in cash but are automatically reinvested to acquire additional shares. Since no funds hit the employee’s bank account, individuals often overlook the fact that income has accrued and that their foreign asset holdings have increased,” he said.
“From a tax perspective, such reinvested dividends still constitute income and must be disclosed. The absence of a visible bank credit does not negate reporting requirements, and these technical misunderstandings have contributed to widespread under-reporting,” he added.
Operational gap
Experts say the tax treatment of reinvested dividends on foreign ESOP shares is broadly similar to dividend reinvestment options in mutual fund schemes, where payouts are used to buy additional units rather than being distributed in cash.
“From a tax-treatment perspective, automatic reinvestment of dividends on foreign ESOP shares is broadly similar to how dividend-reinvestment options work in Indian mutual fund schemes, where distributions are used to buy additional units instead of being paid out in cash,” an tax expert, told Moneycontrol.
“The concern is that many employees simply do not recognise these reinvested amounts as taxable foreign income in India, especially when tax has already been withheld overseas and no cash actually hits their bank account,” he said.
He added that the problem is sometimes compounded by operational gaps in reporting by custodians or overseas brokers.
“This lack of awareness is often compounded by operational gaps at some custodian or overseas broker level, where statements may not clearly highlight the underlying dividend credit and subsequent reinvestment, making it harder for employees to track and report,” he said.
He noted that both the foreign ESOP holdings and the reinvested dividends must be disclosed in the income tax return as foreign assets and foreign-source income.
“It is important to underscore that both the foreign ESOP holdings and the reinvested dividends have to be disclosed as foreign assets and foreign-source income in the Indian income-tax return, and that, wherever tax has been deducted abroad, employees should evaluate claiming foreign tax credit under Indian law and the relevant tax treaty to avoid double taxation,” he said.
“Non-disclosure may lead to penalties of up to Rs 10 lakh for failure to report foreign assets, and penal tax of up to 200 percent of the evaded tax,” he said.
According to tax experts, reinvested dividends can create reporting lapses, if they are not disclosed correctly.
“ESOP holders are generally subject to tax when options are exercised. Since this tax is administered by employers, taxes are deducted as part of payroll. The onus then shifts to the employee to report any further income such as dividends, buybacks or sales, as well as comply with reporting of foreign assets of the tax return,” another tax expert told Moneycontrol.
“It’s quite common for employees to miss reporting foreign dividends on ESOP shares, especially where cash is not realised. This happens where dividends are automatically reinvested into fresh purchases of shares. This could result in two defaults – failure to report the dividend income and also failure to report the fresh acquisition of shares,” he added.
Finance Bill disclosure window
“Finance Bill proposes a one-time amnesty for failure to report foreign assets and ESOP holders could avail of the same,” he said.
The government has proposed a one-time disclosure window for foreign assets under the Finance Bill, 2026.
The proposed scheme, called the Foreign Assets of Small Taxpayers (FAST) Disclosure Scheme, will allow individuals to voluntarily report previously undisclosed foreign assets such as shares received under employee stock ownership plans, overseas bank accounts or other investments.
Under the proposal, taxpayers who failed to disclose such assets in their income tax returns could regularise the lapse by paying a prescribed tax or compliance charge within a specified window, while obtaining relief from prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
Tax experts said the provision could benefit employees of multinational companies who may have inadvertently failed to disclose shares of foreign parent entities or related income in the foreign asset schedule of their income tax returns.
