Last updated: 14 August 2026 | By CS Sapna Malpani, Practising Company Secretary, Bangalore
A Bangalore SaaS startup granted stock options to its first three engineers. Two of them sat in Austin and Toronto. The founder treated all three grants the same way, ran the board resolution, updated the cap table, moved on. Thirty months later, during Series B due diligence, the lead investor’s counsel asked one question: “Where is the FEMA filing for the two overseas grantees?” There was none. An ESOP for non-resident employees is a foreign investment transaction under Indian exchange control law, and it carries its own reporting clock. Miss it and the penalty under Section 13 of FEMA runs up to three times the amount involved, with the whole round stuck until the contravention is compounded.
- Two clocks, not one: file Form ESOP within 30 days of granting options to a non-resident, then Form FC-GPR within 30 days of allotting shares on exercise.
- Who must comply: any Indian company granting ESOPs to foreign nationals, NRIs, OCIs, or employees/directors of its overseas holding, subsidiary or JV.
- Penalty: up to 3x the sum involved (or up to Rs 2 lakh where not quantifiable) plus Rs 5,000/day for a continuing default, under FEMA Section 13.
- New for 2026: the startup ESOP perquisite-tax deferral window widened from 48 to 60 months for shares allotted on or after 1 April 2026.
- Act now: reconcile every past grant to a non-resident and file any missing Form ESOP or FC-GPR before your next diligence.
The problem: an ESOP for non-resident employees is FDI, and most cap tables treat it as ordinary payroll
Options are how early-stage companies pay people they cannot yet pay in cash. When the person holding those options lives outside India, the grant stops being a pure HR matter and becomes a capital-account transaction under the Foreign Exchange Management Act. The moment an Indian company issues an ESOP for non-resident employees, it is issuing a capital instrument to a person resident outside India, which is exactly what the FEMA reporting regime exists to capture.
The governing framework sits in two places. On the company law side, an ESOP scheme is authorised under Section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. On the exchange-control side, the issue to a non-resident falls under Schedule I of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, read with the FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Two statutes, two sets of forms, one grant.
Who is caught by this? A DPIIT-recognised startup with a remote engineer in the United States. A foreign-owned Indian subsidiary that grants its India team options in the Indian entity. An Indian parent that extends its pool to staff of an overseas subsidiary. NRIs and OCIs on the founding team. In each case the grantee is a person resident outside India, and the filing obligation is triggered whether or not any cash changes hands at grant. Startups raising from overseas funds already run into this map through the wider FEMA compliance path for a Bangalore startup with US investors.
The cost of getting it wrong is not theoretical. The RBI publishes FEMA compounding orders every month, and unreported issues of capital instruments to non-residents (delayed FC-GPR, missing intimation) are among the most common line items. Compounding regularises the error, but it is paid time, paid fees, and a disclosure that surfaces in every future data room. For a company mid-raise, the bigger cost is the delay: a diligence flag on an unreported ESOP for non-resident employees can push a closing by weeks.
The two-filing lifecycle you actually have to run
The single biggest misunderstanding is that one filing covers the whole ESOP journey. It does not. A grant to a non-resident generates a filing at grant and a second filing at allotment. Here is the full path from board approval to annual return.
Two of those steps carry a 30-day statutory clock, and they are independent. Filing Form ESOP at grant does not discharge the FC-GPR obligation at exercise, and filing FC-GPR at exercise does not cure a Form ESOP that was never filed at grant. A company that granted options three years ago and only allotted shares last month still owes the original Form ESOP filing, late, with the delay disclosed.
What changed in 2026: the deferral window on ESOP perquisite tax widened to 60 months
ESOP tax in India works in two stages. At exercise, the difference between the fair market value and the exercise price is taxed as a perquisite in the employee’s hands (salary income), with the employer deducting tax. At sale, the gain over the FMV at exercise is taxed as capital gains. The first stage is the painful one, because the employee owes tax on paper wealth in an unlisted company they cannot easily sell.
To ease that, eligible startups can defer the Stage 1 perquisite tax. The relief applies to companies holding an Inter-Ministerial Board certificate of eligible business under Section 80-IAC, in addition to DPIIT recognition. Under the Income-tax Act, 2025, which took effect from 1 April 2026, the deferral window was extended from 48 months to 60 months for shares allotted on or after that date. The deferred tax becomes payable at the earliest of three trigger events.
| Feature | Old law (up to 31 Mar 2026) | Income-tax Act 2025 (from 1 Apr 2026) |
|---|---|---|
| Deferral window | 48 months from end of relevant year | 60 months from end of the tax year of allotment |
| Enabling provision | Section 192(1C), Act of 1961 | Section 392(3) read with Section 289(3) |
| Who qualifies | DPIIT + IMB 80-IAC certificate | DPIIT + IMB 80-IAC certificate |
| Tax payable at earliest of | End of the deferral window, or date of sale of the shares, or date the person ceases to be an employee | |
The extra twelve months matter most to non-resident grantees, who often exercise on departure from the company and can be pushed into a cash-tax event at the worst moment. A wider window buys planning room. It does not remove the FEMA filing duty, which sits on the company regardless of how the employee is taxed.
What you must do now
Run this the same way whether you are granting your first option to an overseas hire or cleaning up three years of grants before a raise.
- Pass the right resolution. Approve the ESOP scheme under Section 62(1)(b) and Rule 12. A listed or public company needs a special resolution; a private company may approve the scheme by ordinary resolution under the MCA exemption notification dated 5 June 2015, provided its articles permit. Keep the scheme document, the explanatory statement and the grant letters on file.
- Value the shares correctly. An issue to a non-resident must respect FDI pricing. The exercise-price shares must be priced at or above the fair value worked out under Rule 21 of the NDI Rules by a registered valuer or a SEBI-registered merchant banker. Under-pricing to a non-resident is itself a contravention.
- Check the sector. Confirm the company operates in a sector where foreign investment is allowed, and within the applicable cap and route. ESOPs to non-residents sit inside the same sectoral limits as any other FDI.
- Open the FIRMS entity. Register the company on the RBI FIRMS portal and keep the Entity Master updated. Filings route through your AD Category-I bank, so line the bank up before the clock runs.
- File Form ESOP within 30 days of grant. Report the grant to each non-resident on FIRMS. Capture grantee identity, number of options, exercise price and scheme terms. This is the filing that is missed most often, because founders think nothing has been “issued” yet.
- File Form FC-GPR within 30 days of allotment. When the employee exercises and you allot equity shares, report the allotment. Attach the valuation certificate and the KYC from the remitting bank where consideration comes from abroad. The mechanics are the same as any equity issue to a non-resident, covered in our FC-GPR filing guide on the FIRMS portal.
- Maintain the statutory register. Record every option in the Register of Employee Stock Options in Form SH-6 under Rule 12(10). Diligence teams ask for it by name.
- File the FLA return by 15 July. Once a non-resident holds shares, the company reports the foreign holding in the annual Foreign Liabilities and Assets return to RBI.
- Reconcile the backlog. Pull every past grant to a non-resident and match it to a Form ESOP and, where exercised, an FC-GPR. File the missing ones late and, where a delay is long, plan a compounding application before an investor finds the gap first. If you have just closed a round, fold this into the wider post-funding 30-day compliance checklist.
Two common errors sink even careful teams. The first is treating an ESOP for non-resident employees as identical to a resident grant, with no FEMA step at all. The second is filing FC-GPR at exercise while skipping Form ESOP at grant, on the assumption that the later filing covers everything. It does not; both filings stand on their own.
The deeper implication
According to CS Sapna Malpani, the risk here is rarely the penalty in isolation. It is that an unreported ESOP for non-resident employees turns up at the exact moment a company can least afford it: inside a term-sheet, when a buyer’s lawyers reconstruct the cap table and test every foreign entry against a FIRMS filing. A grant that felt like an HR footnote in year one becomes a closing condition in year three. The companies that raise cleanly are the ones that filed Form ESOP the week they granted, not the week they were asked.
The forward view: cross-border option pools are only growing as Indian startups hire remote engineers and set up foreign holding structures. RBI has already put its draft Foreign Investment Rules, 2026 out for comment, with the consultation window open till 31 August 2026, and reporting mechanics for instruments like ESOPs are squarely in scope for tidying up. Expect the reporting to get more standardised, not less, and expect diligence teams to keep tightening. Building the two-filing discipline into your grant process now is cheaper than compounding later.
How the reporting forms compare
Founders routinely confuse the FEMA forms because they all report money moving in from abroad. They are not interchangeable.
| Form | Trigger | Deadline |
|---|---|---|
| Form ESOP | Grant of options to a non-resident | 30 days from grant |
| FC-GPR | Allotment of shares (including on ESOP exercise) | 30 days from allotment |
| FC-TRS | Transfer of shares between a resident and a non-resident | 60 days from transfer |
| Form CN | Issue of convertible notes by a startup to a non-resident | 30 days from issue |
| FLA return | Annual foreign holdings snapshot | 15 July each year |
One more distinction worth holding onto: a grant to an Indian-resident employee carries no FEMA filing at all; only company-law compliance applies. It is the non-resident element that pulls the grant into Schedule I of the NDI Rules. And note the classification relief: shares issued under an ESOP or as sweat equity to non-residents are excluded from the foreign-investment computation used to decide whether an Indian company is foreign-owned and controlled for downstream-investment purposes.
- An ESOP for non-resident employees is a foreign investment transaction, not ordinary payroll.
- File Form ESOP within 30 days of grant and FC-GPR within 30 days of allotment on exercise; the two are independent.
- Price the exercise shares at or above fair value under Rule 21 of the NDI Rules using a registered valuer.
- The FEMA Section 13 penalty runs up to 3x the sum involved, or Rs 2 lakh where not quantifiable, plus Rs 5,000/day.
- Report foreign-held ESOP shares in the annual FLA return by 15 July.
- The startup ESOP perquisite-tax deferral is now 60 months for shares allotted on or after 1 April 2026.
- Maintain the Form SH-6 Register of Employee Stock Options; diligence teams ask for it.
- Reconcile every past non-resident grant to a filing before your next round, and compound long delays proactively.
Sources and references
- RBI, Master Direction No. 18: Reporting under Foreign Exchange Management Act, 1999: rbi.org.in Master Directions
- FEMA (Non-Debt Instruments) Rules, 2019, Schedule I and Rule 21 (pricing): India Code
- Companies Act, 2013, Section 62(1)(b) and Rule 12, Companies (Share Capital and Debentures) Rules, 2014: mca.gov.in
- FEMA Section 13 (penalties) and RBI FEMA compounding orders: rbi.org.in Compounding Orders
- ICSI, Issue, Transfer and Reporting of Equity Instruments under FEMA: icsi.edu
- Income-tax Act, 2025, ESOP perquisite deferral, Section 392(3) read with Section 289(3): incometaxindia.gov.in
- DPIIT, Startup recognition and Section 80-IAC eligibility: dpiit.gov.in
CS Sapna Malpani helps startups structure ESOP pools, file Form ESOP and FC-GPR on time, and clean up past grants before diligence.
- Check your exposure with the FEMA Compliance Calculator
- See the Fundraising Compliance service for ESOP and FEMA support
- Track deadlines with the Annual Compliance Checker
- Facing a delay? Start with Penalty & Adjudication support
Talk to us: sapnamalpani.com | WhatsApp: +91 96208 03375
Frequently asked questions
Do I really need a FEMA filing for an ESOP to a non-resident employee?
Yes. An ESOP for non-resident employees is an issue of a capital instrument to a person resident outside India, which brings it under Schedule I of the FEMA (Non-Debt Instruments) Rules, 2019. The company must file Form ESOP on the RBI FIRMS portal within 30 days of granting the options, and Form FC-GPR within 30 days of allotting shares when the employee exercises. A grant to an Indian-resident employee carries no FEMA filing, but the non-resident element pulls the grant into exchange-control reporting. The obligation sits on the company, not the employee, and applies to foreign nationals, NRIs and OCIs alike.
What is the difference between Form ESOP and FC-GPR?
They report different events in the same option’s life. Form ESOP reports the grant of options to a non-resident and is due within 30 days of grant. FC-GPR reports the allotment of equity shares, including shares allotted when a non-resident exercises those options, and is due within 30 days of allotment. Filing one does not discharge the other. A company that filed FC-GPR at exercise but never filed Form ESOP at grant still has an open contravention for the missing grant-stage filing. Run both as separate steps with separate 30-day clocks.
What is the penalty for missing the FEMA filing on an ESOP?
Under Section 13 of FEMA, a contravention can attract a penalty of up to three times the sum involved where the amount is quantifiable, or up to Rs 2 lakh where it is not, plus a further Rs 5,000 for each day a continuing contravention runs after the first day. In practice, most delayed ESOP and FC-GPR filings are regularised through compounding with RBI, where the company admits the delay and pays a settlement amount. Compounding closes the matter, but it is a paid, disclosed event that surfaces in future due diligence, which is why filing on time is far cheaper.
How does the new 60-month ESOP tax deferral help startups?
ESOP perquisite tax falls due at exercise, when an employee owes tax on the gap between fair market value and exercise price even though the shares are illiquid. Eligible startups, meaning companies with DPIIT recognition and an Inter-Ministerial Board certificate under Section 80-IAC, can defer that Stage 1 tax. Under the Income-tax Act, 2025, effective 1 April 2026, the deferral window widened from 48 to 60 months for shares allotted on or after that date. The deferred tax becomes payable at the earliest of 60 months from the end of the tax year of allotment, the sale of the shares, or the date the person leaves the company.
How should a private company approve an ESOP scheme?
An ESOP scheme is approved under Section 62(1)(b) of the Companies Act, 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A listed or public company must pass a special resolution. A private company can approve the scheme by ordinary resolution under the MCA exemption notification dated 5 June 2015, provided its articles allow it. Keep the scheme document, the explanatory statement, grant letters and the Form SH-6 Register of Employee Stock Options on file, since these are the first documents a diligence team asks for when it reviews a cap table.
At what price can we issue shares to a non-resident on ESOP exercise?
Shares allotted to a non-resident on exercise must comply with FDI pricing. The price cannot be below the fair value worked out under Rule 21 of the NDI Rules by a registered valuer or a SEBI-registered merchant banker, determined on an internationally accepted methodology. Issuing below fair value to a non-resident is itself a FEMA contravention, separate from any reporting delay. Keep the valuation certificate dated close to the allotment and file it with the FC-GPR. The same pricing discipline is why ESOP schemes for cross-border teams should fix the exercise price against a defensible valuation from the start.
We granted ESOPs to a US employee two years ago and never filed anything. What now?
File the missing Form ESOP for the original grant now, even though it is late, and file FC-GPR if shares have since been allotted on exercise. Where the delay is long, prepare a compounding application to RBI rather than waiting for the gap to be discovered during a raise. Reconcile every historical grant to a non-resident against a FIRMS filing, fix the register in Form SH-6, and document the clean-up. Doing this on your own timetable is materially cheaper and less disruptive than having a lead investor’s counsel find the gap in the middle of due diligence.