If you are a salaried employee, you have probably noticed a change in your salary structure this month. No, it is not the appraisals.

With the start of the new financial year, two major developments have come into effect: the New Income Tax Act, 2025, which became effective from 1st April 2026, and the new labour codes. Together, they have revived the long-standing debate of the new tax regime versus the old tax regime, while also making CTC structuring more relevant than ever.

In the last two years, the new tax regime has become the obvious choice for most taxpayers. However, recent changes introduced under the New Tax Act may prompt employees to reconsider the old regime this financial year.

Importantly, these changes don’t nudge people into forced tax-saving investments. Instead, it favours households with large, unavoidable expenses, especially those with children in school or college.

Households with children

Two key changes stand out for families with children.

First, the children’s education allowance exemption has been significantly increased from ₹100 per month (per child) to ₹3,000 per month, or ₹36,000 annually. This applies to both school- and college-going children and will meaningfully cover the tuition costs.

Second, the hostel expenditure allowance has been enhanced from ₹300 per month to ₹9,000 per month. This is particularly relevant for college students living in hostels, translating to an annual exemption of up to ₹1.08 lakh on hostel expenses.

Both allowances are capped at two children. So a family can claim up to ₹72,000 through the education allowance alone, and if even one child is in a hostel, the total exemption goes up significantly.

There is a catch, though. These benefits are available only if they are part of your salary structure, which means salaried employees need to actively plan their CTC.

HRA gets a long-overdue update

The second big lever is HRA for residents in Bengaluru, Pune, Hyderabad and Ahmedabad. These cities are now treated as metro cities for HRA purposes. This pushes the exemption limit from 40% to 50% of basic salary, bringing them in line with Delhi, Mumbai, Kolkata and Chennai. HRA exemption is calculated as the lowest of actual HRA components in the CTC, rent paid minus 10% of basic pay or 50% of basic pay for metro cities, or 40% of basic for non-metros.

This change was overdue as rents in tech cities like Bengaluru and Hyderabad have been at par with traditional metros for a while, but tax benefits had not caught up. A higher HRA exemption can materially shift the math in favour of the old regime for residents in these cities.

For many taxpayers, HRA is the single largest component that helps hit the break-even point to benefit under the old regime.

Math in favour of old regime

For taxpayers with a net taxable income above ₹25 lakh, deductions and exemptions exceeding ₹8 lakh are needed for the old regime to become more beneficial. For lower income brackets, the break-even threshold ranges from ₹5.5 lakh to ₹7.87 lakh for those earning between ₹15 lakh and ₹24 lakh (see table below).

Households with school- or college-going children, along with high rental expenses, may find it easier to cross these thresholds. (see infographic)

Structuring CTC is key

All these benefits are available only if they are built into the compensation structure. That makes actively structuring your CTC critical.

This year, many salary structures are already being reworked due to the new Labour Codes. The new Code requires that basic pay, dearness allowance and certain eligible allowances together make up at least 50% of gross salary.

HRA, LTA (Leave Travel Allowance) and variable pay are exempt from the list of eligible allowances, which leaves components such as car lease, reimbursements like fuel and driver’s salary and special allowance to make up the rest alongside basic pay. Car lease, however, is typically fixed and cannot be easily adjusted.

This would mean most employees whose basic pay was earlier low at 30% or lower of gross salary, there will likely be an increase in basic pay. Since HRA is linked to basic, this also increases the potential HRA exemption. A higher HRA naturally translates into higher exemption, especially if rent paid significantly exceeds the HRA component.

Along with HRA, if you have children, it becomes even more important to ensure that the education and hostel allowances are included in your CTC wherever applicable.

Further, you can complement these with the meal allowance exemption, which has also been increased. The Income Tax Act now allows a per-meal exemption of ₹200, up from ₹50 earlier. This applies to employer-facilitated meals and cafeteria, prepaid meal cards and digital food wallets. Cash reimbursements do not qualify.

If fully utilised, this can translate into an annual exemption of up to ₹1.05 lakh, assuming two meals per day, 22 working days a month, over 12 months.

It is worth noting that meal benefits are also available under the new tax regime. So even if you opt for the new regime, you can still claim this particular exemption.

Old regime: expenditures, not investments

This year, the choice between the two tax regimes is less about maximising Section 80C, health insurance or home loan interest deductions. The decision now hinges largely on real, unavoidable expenditures such as rent and children-related allowances.

Deductions like 80C and loan interest can still help, but they play a supporting role. On their own, they are unlikely to tilt the balance in favour of the old regime.

So, when deciding between the new and old regimes, the first step is simple: check whether your eligible expenditures, along with standard deduction and tax-saving expenses of loan interest or PF deductions under 80C, help you cross the break-even threshold. If they do, the old regime may work in your favour.

If they do not, it is not worth stretching to get there. Avoid making forced investments into ELSS or Ulips under 80C or NPS purely for marginal tax savings. Locking money into instruments you would not otherwise choose, just to save a few thousand rupees in tax, often does more harm than good. In such cases, the new tax regime, with its simplicity and lower compliance burden, is the better option.

Smita’s is a hypothetical example

When you sell your mutual fund investments above their cost price, you have to part with a portion of your profits in the form of capital gains tax.

That pinch in your pocket hurts! It’s like getting the keys to your first home, only to realise that you have to cough up a significant amount in brokerage fees.

But there’s a catch. Non-resident Indians (NRIs) from countries like the United Arab Emirates, Mauritius, and Singapore, among other eligible nations, can avoid this capital gains tax.

Many non-residents don’t even know this option exists, let alone how powerful it can be.

If your ₹40 lakh investment in mutual funds grows to ₹1 crore over five years, you will incur a capital gains tax of approximately ₹7.5 lakh. So, what you actually take home after tax is ₹92.5 lakh, not ₹1 crore. However, NRIs from certain countries can take home the full ₹1 crore.

How is it possible?

The Double Taxation Avoidance Agreement (DTAA) is a pact that India has signed with several countries to ensure that the same income is not taxed twice.

Without it, an NRI could face a dilemma: should the tax be paid in India or in the country of residence? DTAAs resolve this by clearly defining which country has the right to tax specific types of income.

When it comes to mutual funds, DTAAs with countries such as the UAE, Mauritius, and Singapore specify that taxation will occur in the country of residence. This creates an advantage—since these countries do not levy tax on mutual fund capital gains, such gains are effectively tax-free.

To be precise, mutual funds are not explicitly mentioned in the DTAA. For instance, Article 12(4) of the India–UAE DTAA states that gains from shares will be taxed in India. However, Article 13(5) states that income from assets other than shares and immovable property will not be taxed in India.

Since mutual funds are not classified as shares, they are taxed in the country of residence—UAE in this case. Recall that the UAE does not levy tax on personal income or capital gains.

Are there any case laws?

In the case of Saket Kanoi vs. DCIT, an NRI based in the UAE earned ₹1.34 crore by selling Indian mutual funds. However, the Assessing Officer argued that these gains should be taxed in India as shares under Article 13(4). The investor contested this, stating that mutual funds are not shares and should instead be taxed under Article 13(5), which assigns taxing rights to the UAE.

The ITAT ruled in favor of the assessee (the taxpayer). It clarified that mutual fund units are trust securities, not equity shares. Therefore, the provision allowing India to tax gains from shares did not apply. Instead, the UAE was granted the right to tax the gains—and since the UAE does not levy capital gains tax, these gains were effectively tax-free.

In another case, Anushka Sanjay Shah, an NRI based in Singapore, earned ₹1.35 crore in short-term capital gains from the sale of equity and debt mutual funds. Similar to the previous case, she claimed exemption under Article 13(5) of the India–Singapore DTAA. However, the Assessing Officer rejected her claim and treated the gains as shares under Article 13(4) of the DTAA.

The ITAT again ruled in favor of the taxpayer, stating that mutual funds are trusts and not companies under SEBI regulations. Since the term “shares” is not defined in the DTAA, and mutual fund units are not considered shares under the Companies Act, such gains cannot be taxed in India under Article 13(4).

Which countries actually benefit from this?

India has signed close to a hundred DTAAs with various countries. However, there is no exhaustive list of nations that enjoy mutual fund taxation benefits under these agreements, as each treaty contains specific clauses that must be examined on a case-by-case basis.

Based on our understanding, some eligible countries include the UAE, Singapore, Mauritius, Hong Kong, Qatar, Kuwait, Saudi Arabia, and Oman, among others.

We strongly recommend consulting a tax expert, as each country’s DTAA may have distinct provisions and interpretations.

For instance, Article 24(1) of the India–Singapore DTAA states that an NRI can avail tax benefits on the sale of mutual funds in India only when the proceeds are repatriated to Singapore. Since mutual fund capital gains are taxable in Singapore (and not India), the treaty requires the funds to be remitted to Singapore for taxation to apply there. That said, not all chartered accountants agree with the interpretation that repatriation is necessary for the gains to be considered tax-free.

How are capital gains from other asset classes taxed?

The DTAA provisions of certain countries that provide benefits for mutual fund gains do not extend to shares.

Investments in stocks made through Portfolio Management Services (PMS) also do not qualify for DTAA benefits, as the underlying assets are held in the investor’s own demat account and are treated as direct equity holdings. However, if a PMS invests in mutual funds as the underlying asset, eligible NRIs may still avail of DTAA benefits.

That said, gains derived from bonds and derivative instruments may also qualify for DTAA benefits, similar to mutual funds, as they can fall under comparable definitions within certain treaty provisions.

What do you need to claim DTAA benefits?

To claim DTAA benefits, an individual must satisfy two conditions. First, they must qualify as a tax resident of their home country. Second, they must establish tax residency in the foreign country by obtaining a Tax Residency Certificate (TRC).

Let’s understand this with the example of UAE-based NRIs. Among other requirements, an NRI must be physically present in the UAE for at least 183 days within a 12-month period to be eligible for a TRC from the UAE tax authorities. Additional documentation may also be required.

Form 41 (previously Form 10) must also be generated digitally through the Indian income tax portal. It is a mandatory self-declaration form that non-residents must submit to claim DTAA benefits. The form captures key information that tax authorities use for their records.

Eligible NRIs can claim DTAA benefits while filing their Income Tax Return (ITR). They need to navigate to the Schedule TR (Tax Relief) section, select the relevant article for capital gains, and provide details such as the tax paid in India, the amount of relief claimed (full, in this case), and the method of exemption. In some cases, asset management companies (AMCs) may also refrain from deducting TDS on mutual fund gains if the required documents are submitted in advance.

Things to note

For eligible NRIs, DTAA benefits that provide exemption on mutual fund capital gains can be a significant advantage. However, they should consult a qualified tax professional to correctly claim this relief. That said, investors should not aim to become NRIs of a particular country solely to avail of this tax benefit.

Another important factor to consider is the cost of obtaining a Tax Residency Certificate (TRC). Each country has its own procedures and associated costs, and it is crucial to understand these before pursuing the tax benefit.

Inbound GIFT City funds that invest in domestic mutual funds are also tax-free and do not attract TDS in India. This means that NRIs from countries such as the UAE, Singapore, and Mauritius can enjoy benefits similar to those available through direct mutual fund investments.

At its core, this highlights an important idea: where you live can matter as much as how you invest. For some NRIs, the DTAA can quietly become a meaningful advantage, reducing tax outgo over time. However, this is not a blanket rule—the benefit depends on fine print, proper documentation, and evolving regulations.

Used correctly, it can materially improve post-tax returns. The takeaway is simple: understand the treaty, get the paperwork right, and seek professional advice before taking action. Because in investing, it’s not just about what you earn, but what you get to keep.

When Neha* got exposure to US stocks through her RSUs, she first thought they would be a good addition to her otherwise India-heavy portfolio. Like many others investing in US stocks and ETFs, she had no idea that a US tax law could eat up 40% of her portfolio overnight.

Not long ago, the Indian stock market felt invincible. From 2003 to 2018, the Indian stock market was the best-performing among the world’s top 40 stock markets. However, the tide started to change.

The US S&P 500 outperformed the Nifty and Sensex over the last decade. And by now, it’s no longer news that the rupee keeps losing ground to the dollar. Step into the shoes of an Indian investor, and the US stock market starts looking attractive.

So, when Neha was offered RSUs linked to her US employer’s listed entity, she thought it was a natural fit, at least for her portfolio. After working for 17 years in the firm, she retired with a portfolio of $4 million in her US employer’s stock.

But here comes the tricky part: If she passes away as an Indian holding a US asset, she will have to part ways with up to 40% of her portfolio value beyond $60,000 in the form of estate or death taxes. (see illustration).

While India doesn’t have an estate tax per se, the US levies it, even on non-residents aliens like Indians if they have assets situated in the US.

For non-residents aliens of the US, such as Indians having US stocks or other US assets, the tax treatment is particularly unfavourable. They have to pay estate tax on US assets beyond $60,000. Meanwhile, US citizens pay estate tax on assets only if it exceeds a threshold $15 million!

This threshold limit gets adjusted upwards every year for US citizens. For instance, in 2016, the estate tax was levied beyond $5.45 million per person, and now the threshold has gone up to $15 million. On the other hand, the limit for non-residents is just $60,000 and has not been revised upwards since 1976.

For Indians, the US estate tax applies to all US situs assets. Such assets include those located in the US, such as US-domiciled funds, cash held in US bank accounts, and US real estate. Estate tax applies even if the underlying investments are outside the US, as they are considered US situs assets — for example, a US-listed ETF investing in Brazil is still subject to estate tax.

How to mitigate the death tax

Proponents of the estate tax argue that the death tax is necessary as a way to redistribute wealth from the rich to the masses. On the other side, some people feel that such taxes disincentivise saving. The argument is: if you have to pay so much tax beyond a point, why not spend that money and die poor?

That argument aside, it is crucial for people living outside the US (non-US tax residents) and having US assets to think of ways to mitigate the impact of estate tax levied by the US. After all, it’s not ideal to pay estate tax to a country that you don’t belong to. Appropriate planning can help avoid falling into this trap.

Most investors who are aware of the US estate tax do this by diversifying their US stock holdings (or US ETFs) into funds domiciled outside the US.

Outbound funds based on GIFT City funds are an interesting option for employees looking to diversify their US RSU holdings to avoid estate tax. Such funds are tailored for Indian investors, and RSU holders can keep their investments diversified across geographies.

When you sell US stocks or other foreign listed shares, the taxation is straightforward. If the foreign investments are sold after 24 months, then 12.5% tax will be applicable on the gains. If they are sold before that, tax at the investor’s slab rate will be applicable.

In the case of employees with RSUs linked to US shares, it’s paramount to safeguard their US assets from estate taxation, as a huge part of their net worth is tied to a US stock. If you are a non-resident and have large US holdings as part of your portfolio, it’s crucial to start planning your portfolio to mitigate the risk of US estate taxation.

Share this with anyone holding large US stocks or ETFs, or with someone who holds RSUs of their US employer.

*Character is hypothetical

It’s that time of the year when investors start looking for legal ways to reduce their tax bills. Tax loss harvesting is one such strategy.

It’s the practice of selling loss-making investments and using those losses to offset gains elsewhere, reducing the overall tax liability.

This approach can also be used to remove underperforming funds from your portfolio, all while reducing your tax bill through tax loss harvesting.

How it works

Imagine holding two equity mutual funds. One has slipped from ₹20 lakh to ₹18 lakh, leaving you with a ₹2 lakh notional loss. The other has climbed from ₹10 lakh to ₹14 lakh, giving you a ₹4 lakh gain.

Now, if you want to redeem the scheme with the gains, then you have to book a Rs 4 lakh profit. Assuming the fund qualifies for long-term capital gains tax, you effectively pay tax on ₹2.75 lakh of profit. For context, LTCG up to ₹1.25 lakh on stocks and equity mutual funds is tax-free.

By using tax loss harvesting, here’s how you can optimise your capital gains tax.

You can sell the loss-making scheme and book a ₹2 lakh loss, which can be set off against your ₹4 lakh gains. This reduces your taxable gains to just ₹75,000 (₹2.75 lakh – ₹2 lakh), compared to ₹2.75 lakh earlier.

So instead of fretting over choosing the wrong fund, that loss-making scheme can actually help you save some taxes. All thanks to tax loss harvesting!

Before tax loss harvesting: ₹34,375 tax

After tax loss harvesting: ₹9,375

Tax saved: ₹25,000

Going forward, if you reinvest the proceeds from the loss-making investment into a new fund and assuming it doubles, your ₹18 lakh would grow to ₹36 lakh, making you liable to pay tax on the ₹18 lakh gain.

For a second, let's assume that you never sold the loss-making fund that you had used for tax loss harvesting, and it also doubled just like the other fund.

Now you might be thinking: If I hadn’t sold the loss-making fund, would I have paid less tax in the future and offset the earlier savings over time? After all, your ₹20 lakh investment would have grown to ₹36 lakh, the same amount of gains in future compared to if you had used tax loss harvesting.

Is that really the case? Not quite. With everything else equal, the total tax may be the same, but money saved today is more valuable than the same amount in the future due to inflation.

Not to mention, if you’re looking to exit loss-making funds or stocks, tax loss harvesting provides a clean, tax-efficient way to do so.

In fact, if you had used the losses to offset short-term capital gains, which are taxed at a higher rate of 20% and do not benefit from the ₹1.25 lakh exemption, you can achieve immediate tax savings if your future investments qualify for long-term capital gains when sold.

Another common strategy is to realise long-term capital gains from listed stocks and equity mutual funds while keeping gains within the ₹1.25 lakh exemption limit, allowing profits to be booked tax-free. Reinvesting the proceeds in the same fund resets the cost base higher, helping reduce future capital gains tax.

Things to keep in mind

Remember that if you fail to file the ITR by the due date (July 31st), then capital losses cannot be carried forward.

If the losses exceed the gains in that financial year, there is no need to panic. Any remaining losses can be carried forward for up to eight assessment years and used to offset capital gains in the future, provided the tax returns were filed on time.

While short-term losses can be used to set off against both long-term and short-term gains, long-term capital losses can only be used to offset other long-term capital gains.

Moreover, if you sell a stock or MF to book losses and buy the same stock/MF on the same day, it will be considered an intraday trade and taxed as speculative income. Such losses cannot be set off against other heads of capital gains.

There are rules on what kind of capital loss can be used to offset against gains. For instance, intraday losses can only be adjusted against intraday gains and are not eligible to set off against other types of gains.

Ionic View

Tax harvesting separates the investor who actively manages their portfolio from one who merely holds it. Both may hold identical portfolios, yet the active investor steadily trims their tax liability while the passive investor defers it all, until exit triggers a larger tax outgo.

However, booking losses to offset current or future gains makes arithmetical sense, but the obsession with tax harvesting can quietly turn a long-term investor into an accidental trader.

The line, therefore, is simple: use tax harvesting when it aligns naturally with your portfolio decisions, not when it forces you to exit.

With the Ionic App, you can get a detailed scheme wise and category wise breakdown of your long term and short-term holdings, to identify funds which can offset your gains with losses.

To access this information, go to the Mutual Funds section on the Ionic App, navigate to Tax Loss Harvesting, refresh your holdings and download your report.

Imagine this: You are managing a warehouse stacked with hundreds of biscuit boxes. A customer walks in asking for a few cartons. Which ones do you pull off the shelf?

The answer is straightforward. Pick those that have been lying in the warehouse for the longest time. It makes sense because packaged foods have expiry dates, so older stock should be cleared off the shelf first.

But what does this have to do with gold ETFs?

Well, the tax department follows the same first-in-first-out (FIFO) method while calculating capital gains tax on your investments.

At a time when the monthly inflow into gold ETFs surpassed that of equity mutual funds for the first time in January 2026, there isn’t a better time to understand how to make this work in your favor.

How it works

Take Mr A, who prefers buying gold ETFs rather than jewellery or bars. He buys Rs 25 lakh worth of gold ETFs every month from January to March and plans to withdraw around Rs 30 lakh in April to buy a car.

Let’s say the NAV of those gold ETFs was Rs 50 in January, Rs 65 in February, Rs 80 in March, and Rs 95 in April — the month when he sold them.

To know how many units Mr A received each month, you simply divide Rs 25 lakh by the NAV price at which those units were bought.

In January, he would have received 50,000 units; in February, 38,462 units; and in March, 31,250 units.

In April, the NAV was Rs 95, so Mr A would end up selling 31,579 units of the gold ETF at that price to receive Rs 30 lakh in hand.

But what will be the capital gains tax on those 31,579 units that were sold?

You see, Mr A bought those ETFs at Rs 50 in January, Rs 65 in February, and Rs 80 in March. While the selling NAV price is Rs 95, the units that are used for the purpose of calculating the acquisition cost will have a bearing on the capital gains tax.

Back to the biscuit warehouse example. Just like the warehouse manager, the taxman will follow the FIFO principle while calculating capital gains.

Recall the earlier example, where the first thing that comes in is also the first one to go out. In this case, the first tranche of gold ETFs bought at an NAV of Rs 50 in January will be considered as the cost price when the above ETFs are sold at an NAV of Rs 95.

The first 50,000 units sold will have an NAV cost of Rs 50, the next 38,462 units sold will have an NAV cost of Rs 65, and then 31,250 units will have an NAV cost of Rs 80.

In this case, Mr A wanted to sell gold ETFs worth Rs 30 lakh at an NAV of Rs 95, which translates to selling 31,579 units of the gold ETF. Since the taxman follows the FIFO method, those units will be considered as being sold from the lot bought at an NAV of Rs 50. This translates into capital gains of Rs 45 per unit (95–50).

In aggregate, Mr A will book Rs 14.2 lakh in short-term capital gains. Since short-term gains are taxed at the slab rate (assuming 30%), Mr A would have to pay Rs 4.26 lakh in capital gains tax.

But is there a better way to do this? After all, gold ETFs are not like biscuits that have an expiry date, and it should be possible to choose which units to sell first.

A better strategy

Let’s say Mr B did the same thing as Mr A — he bought Rs 25 lakh worth of gold ETFs for three months and sold Rs 30 lakh worth of gold ETFs in the fourth month. However, instead of buying ETFs from the same company, Mr B bought those ETFs from three separate AMCs in January, February, and March.

The only difference was that instead of buying ETFs from the same AMC, Mr B bought them from three separate AMCs across those three months.

But how does that help?

By doing this, Mr B can choose which AMC’s gold ETF he wants to redeem by looking at their NAV. Mr A did not have this option as he had purchased those gold ETFs from only one AMC.

Did you know: In the US, brokers allow investors to choose which securities they want to sell, thereby giving them more flexibility over how much tax they pay.

For instance, if Mr B chooses to sell the units bought in March, the cost price will be the Rs 80 NAV, i.e., Rs 15 profit per unit instead of Mr A’s Rs 45 profit for tax calculation. In this case, the gains will be Rs 4.74 lakh and taxed at 30% STCG, i.e., Rs 1.42 lakh.

What should you do?

You might be thinking that the units bought at a lower NAV will eventually need to be sold. Well, that’s right. However, the bucket strategy above isn’t just about short-term tax savings — it’s about giving investors flexibility.

This strategy can help investors when they are investing part of their portfolio for the long term and part for the short term in the same asset class. Also, sometimes there is a market correction when investors want to exit. If the selling price is lower than the NAV of recent purchases, those losses can be used to offset other capital gains.

This strategy works well with index funds and commodity products like gold and silver ETFs. In such products, different AMCs track the same underlying without much divergence.

That said, consult a tax expert before taking any action. Different rules apply to stocks and mutual funds.

A few months ago, the income tax department sent out an advisory via email to employees of multinational companies.

They had stock options of the foreign entity, and the taxman’s message was clear: Don’t forget to disclose if you got any foreign assets, including stock options.

For starters, it is not uncommon for foreign companies that have a base in India to offer employee stock option plans (ESOPs). The tricky part comes when the underlying stock option is in a foreign entity.

There is a Rs 10 lakh penalty under The Black Money Act, 2015, if you fail to report foreign assets or income in your ITR.

Unlike listed Indian shares, foreign assets have strict disclosure requirements. Holding foreign shares requires voluntary disclosure in the Schedule Foreign Assets (Schedule FA) in the income tax filings.

Prakash Hegde, a chartered accountant based in Bangalore, said that if the taxpayer is found not to have paid tax from a foreign source at all, then a higher tax can be applied in addition to the Rs 10 lakh fine for non-disclosure.

“Note that even if tax was paid, disclosure is mandatory for foreign assets and income,” added Hegde.

For context, Indian authorities use various sources, including Automatic Exchange of Information (AEI) agreements with other countries, to find out assets that Indians hold abroad.

With India being an important commercial hub, many senior executives are now working in foreign companies and have foreign ESOPs. Hence, we have compiled a list of common mistakes that such people make.

The list was compiled with the help of 3 chartered accountants who have extensively worked with employees holding foreign ESOPs: Prakash Hegde, a Bengaluru-based CA; Ashish Karundia, CA firm Ashish Karundia & Co., and Laxmi Ahirwar, CA and Director, P. R. Bhuta & Co.

Missing foreign disclosure altogether

Many people fail to disclose that they have foreign shares altogether. On exercise of foreign ESOPs, the shares come to a foreign brokerage account created by the employer. Since the account was not opened by them, it’s no surprise that quite a lot of people skip reporting it in their ITR.

Tax was also deducted when the ESOPs were exercised. When the stock options are exercised, the difference between the exercise price and fair value at the time of exercise is taxed as a perquisite (like salary) at the slab rate.

CA Ashish Karundia said that the onus is on the company to deduct the tax on exercise, but the onus of reporting it is with the employees getting those shares.

He said that many people assume that since tax was already paid to Indian authorities, a separate disclosure is not required. However, paying tax does not mean they should not disclose those assets.

Not disclosing shares sold during exercise

As mentioned above, when ESOPs are exercised, perquisite tax is taken on the difference between the exercise price and the fair market value at the time of exercise. But this might be a huge amount, and the employee has yet to receive any cash in hand. So how does one pay this tax?

Many companies sell a part of the shares immediately after the shares are credited to the employer’s brokerage account. The employer transfers this amount from the foreign brokerage account to the Indian subsidiary, which in turn pays the amount as perquisite tax to the IT department on behalf of the employee.

So what’s the problem? Hegde said that many people report only the shares left in their account and often forget to report those shares that were sold to pay tax.

The risk is that the IT department can get the details of the shares sold overseas. But without disclosure of those foreign assets, the IT dept might think that this amount has escaped from capital gains taxation. In reality, since the shares are credited and sold on the exercise day itself, the difference between the cost price and the selling price would be minimal and thus result in minimal capital gains tax.

“They should disclose both the cost price and the selling price; this will make it clear. Otherwise, the IT dept might treat this income as escaping taxation,” added Hegde.

Not disclosing dividends

After the shares get credited to the account, some stocks might give out dividends. Many employees forget to report such dividends as income from a foreign source in their ITR. In the last budget, it was mentioned that if a foreign asset (other than immovable) was not disclosed and the value is below Rs 20 lakh, then a penalty may not be applied.

That said, there is no threshold defined for levying a penalty for non-disclosure of income. And dividends are part of income from foreign sources.

Not claiming credit for taxes paid in a foreign country

Some incomes are taxed both in India and abroad, but many don’t claim credit in India for the tax paid abroad. For instance, dividends from US stocks attract a 25% withholding tax. If you get $100 as dividends from US stocks, they will deduct $25 and pay out $75.

Even then, the entire $100 needs to be again declared for tax in India. If the person was under the 30% slab rate, then a $30 tax would be applicable in India. However, they can submit Form 67 in their ITR and get credit for the $25 already paid in the US.

“This also needs to be reported in Schedule FSI (Foreign source income), Schedule TR (Tax Relief) and Form 1042-S (issued by foreign broker and includes tax deducted). By doing this, they only have to pay $5 ($30-$25),” said Laxmi Lahiwar, CA and Director, P. R. Bhuta & Co.

“If the foreign country’s tax was more than India’s, then that extra amount is a deadweight loss,” added Ahiwar.

Ionic’s view: What should you do?

Hardik Mehta, tax lead at Ionic Wealth, recommends that high-net-worth individuals with foreign ESOPs familiarise themselves with the basics of foreign asset reporting in India. “It also helps to keep proper records of all transactions that happened with the foreign assets for future reference incase any dispute arises.”

However, he said that foreign asset disclosure is not an easy task and requires domain expertise. For instance, while income from India follows the financial year for tax purposes, foreign asset reporting is done based on the calendar year.

The proper way of reporting and which ITR forms to choose for reporting also varies for different foreign assets. Also, not just the buy and sell price, but the peak value of the foreign assets in the year might be required to be reported for certain foreign assets.

There can also be other complications. If the employee gets US shares via ESOPs but then passes away for any reason, then 40% estate tax might be applicable beyond $60,000.

We recommend consulting a qualified tax professional to avoid getting into trouble and to avoid heavy penalties under the Black Money Act. Consulting an investment advisor on whether to hold, sell or diversify the shares you got through the ESOPs is another part of the puzzle.

Also Read: How ESOPs works?

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You participate in the ‘Kaun Banega Crorepati’ show and reach the final stage — one question away from hitting that one crore jackpot. Just imagine all the things you could do with one crore rupees.

In reality, the prize money comes with a Rs 32 lakh tax bill. You receive only Rs 68 lakh after paying tax, far behind one crore. What a bummer, right?

Something similar happens with employee stock ownership plans (ESOPs).

For starters, ESOPs give employees the right to buy the shares of their employer at an exercise price, which is typically lower than the market price.

If the shares perform well in the future, you could theoretically make a lot of money. Well, maybe it’s not that simple.

Example

Let’s say Raj was offered 5,000 ESOP shares at an exercise price of Rs 100, a slight discount to the current share price of Rs 120.

His employer told him that he had to work for at least 24 months to be able to exercise the option. This is called the ‘vesting period’.

It’s a win-win situation for both parties.

Raj can hypothetically make a lot of money if the startup becomes the next big thing. Meanwhile, the company gets to retain employees like him and manage its budget through ESOPs.

Of course, there was a flipside.

If the fair value of the share falls below the exercise price, the stock option is basically worthless.

But let’s assume for a second that things turned out well for Raj. After 24 months, the fair market value (FMV) of the share becomes Rs 300.

If that’s the case, he can tell his employer to give him 5,000 shares at Rs 100 and pocket the difference. In other words, it means paying Rs 5 lakh (5,000 shares × Rs 100) to the employer and getting shares worth Rs 15 lakh.

Simple, right? This is where taxes come in to bite.

The Tax Effect

Firstly, Raj needs to put up an upfront amount if he wants to exercise those ESOPs. While five lakh seems reasonable in our example, employees sometimes have much larger ESOPs.

Second, and more importantly, the difference between the exercise price and the fair value of the shares at the time of exercise is taxed as a perquisite using the applicable slab rate.

Raj paid Rs 5 lakh and got shares worth Rs 15 lakh. Even though he hasn’t sold any of those shares, the government wants him to pay upfront tax at slab rate on the Rs 10 lakh paper profit.

It’s not the ideal scenario. If Raj falls under the 30% tax slab, he will have to pay Rs 3 lakh as tax to the government over and above the Rs 5 lakh exercise price. This will also include additional surcharge and cess.

And if the company is unlisted, you don’t really know for sure whether Raj will be able to sell his shares in the unlisted market. Not the best situation to be in :)

Now, let’s say Raj paid the perquisite tax and now has the shares in his demat. And guess what? He also found a buyer for them. While this is good, he still needs to pay another tax in the form of capital gains before the money finally hits his bank account.

For instance, let’s say the share price is now trading at Rs 500, and the startup has also been listed on the stock exchange, allowing him to easily sell the shares. In this case, the taxman will consider the price at which the perquisite tax was paid as the cost price and calculate the capital gains tax accordingly.

In this example, Rs 200 (Rs 500 – Rs 300) is the profit on each share. On 5,000 shares, the total profit becomes Rs 10 lakh, out of which Rs 1.1 lakh needs to be paid as capital gains tax (see infographic).

Things to keep in mind

It’s important to understand the details of your ESOP plan while negotiating your salary package with your employer. While it is relatively easier to liquidate and sell the shares if the company is listed, it can be challenging to find buyers if the shares are unlisted.

Not to mention, the calculation of the fair market value (FMV) for listed and unlisted shares varies.

In many cases, companies provide staggered vesting where a portion of the ESOPs becomes exercisable after each interval. For instance, 20% of the options may become valid after every 12 months of employment.

If you leave your job in the middle, the terms and conditions might include a clause that restricts or reduces the time period in which you can exercise your options.

Proper planning is a must when it comes to ESOPs.

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Heads-up. In the coming weeks, we will cover a range of ESOP-related topics including how to save taxes on ESOPs, what to keep in mind when holding foreign ESOPs, how to include ESOPs in your will, and more.

Subscribe to our newsletter to stay updated on upcoming posts.

With inputs from Hardik Mehta, Tax Lead at Ionic Wealth.

‘Nothing is certain except death and taxes’ - Benjamin Franklin, 1789

For many, this sentence rings a bell only after the tax department sends them a notice for failing to file tax returns on behalf of a family member who recently passed away.

As ironic as it sounds, Rohan’s family realised that it made perfect sense. He was earning a salary while he was alive, and the law clearly stated that his tax obligations don’t just disappear with his passing.

It’s a fair way of looking at things. Rohan might also have been eligible for a tax refund, and death shouldn’t stop his family from getting back that money.

So, here’s what we have today: A simple guide to filing a loved one’s final ITR. And what happened when Rohan’s family missed filing it!

Illustration

Let’s help Rohan’s family by breaking it down, step by step.

1. What income must be reported in Rohan’s year end ITR?

2. Who should be filing the ITR on his behalf?

3. Who files tax on ongoing income (like rent) after his death?

The first part is straightforward. Section 159 of the Income Tax Act, 1961 says that there’s no running away from taxes.

In short, when a person dies, their legal representative becomes responsible for paying any tax, interest, or penalty that the deceased would have had to pay if they were still alive.

It also mentions that “any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative.”

How to report

Before jumping in, let’s first divide Rohan’s income into two buckets: the income that he was earning until his death and the other part: rental and other income that continues even after his death.

For the income earned before passing, a legal representative must file the ITR on behalf of Rohan.

For starters, a legal representative is a person who represents the assets of the deceased in his absence. They can be his spouse, children, close relative or executor of the will.

They are responsible for managing things like tax filing and other tax matters for the deceased. Note that it’s not the same as a legal heir who inherits the property of the deceased although a person can be both a legal representative and a legal heir.

One can apply to be a legal representative through the Income Tax (IT) portal. They can do this by logging to their own IT portal and submitting an application.

You can follow the steps here.

After submitting the request, it takes around 7 days for the Centralized Processing Centre (CPC) to approve it.

Once that’s done, the legal representative of the deceased can file the tax return on behalf of the deceased. It’s same as filing a normal IT return, just that you’re filing on behalf of the deceased.

But you might be thinking: What happens to the income that continues even after death? Things like rental income from a real estate property or interest from bank fixed deposits.

Two things can happen here. If Rohan left behind a will, the executor is responsible for filing the tax returns until the assets are eventually distributed to the legal heirs.

On the other hand, if Rohan died interstate i.e. without a will, then his assets will first be divided as per the applicable succession law. Whoever inherits the property will report and pay tax on it using their own PAN.

Forgot to file. What happens?

Let’s say our imaginary character Rohan died in a car crash on 10th September 2024. Ideally, his ITR should have been filed in the normal tax window i.e. from 1st April 2025 to 31st July 2025.

If that wasn’t done, the last date for filing belated returns is 31st December 2025 albeit with a penalty and interest for late filing.

We should not be missing this deadline.

After December 31st, 2025:

1. The IT portal will no longer have the option of filing ITR.

2. Tax refund cannot be claimed even if Rohan has paid excess TDS.

3. The assessing officer can send notice to inquire on the non-filing of the ITR.

To be sure, while the notice can be served to the legal representative on behalf of the deceased, the total tax liability is limited to the estate of the deceased.

For instance, if the deceased had a tax liability of one crore rupees but left behind Rs 80 lakh in assets, then only Rs 80 lakh can recovered.

What should you do?

Handling tax matters after someone’s death is sensitive but essential. Timely action ensures that the deceased’s affairs are settled smoothly and without future disputes.

The first step is identifying who will take responsibility - the legal representative or executor and registering them so that they can act on behalf of the deceased.

Next, the income up to the date of death must be reported in the final return, filed within the applicable timelines to avoid any loss of eligible tax benefits.

Where income continues to accrue from the estate, the person in charge must ensure taxes are correctly handled until the assets are transferred to the rightful beneficiaries.

And finally, responding promptly to any communication from the tax department safeguards the family from avoidable disputes later.

While the tax rules may seem complex, a little preparation can ensure that fulfilling these obligations becomes just another way of honouring the legacy of those we love.

***

Rohan’s example is hypothetical.

With inputs from Hardik Mehta, Lead Tax at Ionic Wealth