The 2025 ITAT Ruling on NRI ESOPs: Why a Dubai Resident Still Owed Rs 20.45 Lakh on Options He Exercised Abroad

In November 2025 a tax tribunal told a UAE-resident former HDFC Bank employee that he owed India Rs 20.45 lakh on stock options he had exercised years after he had stopped living in India. He had argued the obvious-sounding point: he was a tax resident of Dubai when he exercised, the UAE charges no personal income tax, so the gain should be the UAE's to tax, which meant nobody taxed it. The Income Tax Appellate Tribunal disagreed on every limb and let the demand stand. The case is now the cleanest statement we have of a rule that catches NRIs out repeatedly, and it is worth understanding in full because the principle it confirms is one you can use to pay less, not just one that can cost you.

The 30-second answer: The ITAT confirmed that an NRI's ESOP or RSU perquisite is sourced to where you performed the employment that earned the grant, not to where you live when you exercise. An HDFC employee granted 18,500 options in June 2007 while working in Mumbai, who moved to Dubai on 1 October 2007 and exercised in FY 2012-13, still owed India Rs 20.45 lakh, because the grant rewarded Indian service. Article 15 of the India-UAE treaty taxes employment income where the work is done, so it confirmed India's claim rather than removing it. The flip side is the useful part: a perquisite earned by working abroad during the grant-to-vest window is not India-taxable, and a split period is apportioned by days worked. Keep your grant letter, vesting schedule and relocation date to prove your fraction.

This piece sits alongside the full mechanics in the RSU and ESOP taxation guide; here I am going to stay on the ruling itself, what the Tribunal actually decided, where the reasoning bites, and the two things you should change in your own paperwork because of it. If you take one idea away, make it this: residence at the moment of exercise is the wrong question, and a tax preparer who answers it is going to cost you money in one direction or the other.

What the Tribunal actually decided

Strip away the framing and the facts are tidy. The taxpayer, an employee of HDFC Bank in Mumbai, was granted 18,500 options at an exercise price of Rs 219.74 in June 2007 as part of his India-based compensation. On 1 October 2007 he was deputed to the bank's representative office in Dubai and became a non-resident, a tax resident of the UAE. The options vested in the 2008-09 window and he exercised them several years later, in FY 2012-13, by which point he had been outside India for years. He treated the resulting perquisite as UAE-sourced salary and claimed relief under Section 90 read with Article 15 of the India-UAE Double Taxation Avoidance Agreement, on the logic that the income belonged to the country where he was resident and working when he exercised.

The Assessing Officer rejected that, the first appellate authority upheld the AO, and the ITAT upheld both. The Tribunal's reasoning had two moving parts that you need to hold separately.

First, the domestic-law point. Under the Income-tax Act, an ESOP perquisite is taxed under Section 17(2)(vi), and the timing of that tax is fixed at the moment of exercise or allotment. But timing is not the same as source. The Tribunal held that the income arises from the employment exercised during the period that earned the option, and that employment, at the point the grant was made and the relevant service rendered, was performed in India. Section 17 decides when the perquisite is taxed; Section 9(1)(ii), which deems salary "earned in India" to accrue here when it is for services rendered in India, decides where it is sourced. Where you happen to be resident on the exercise date does not move the source.

Second, the treaty point, which is the one most NRIs assume will save them and which did the opposite here. The Tribunal held that Article 15 of the India-UAE treaty taxes employment income, including a share-based perquisite, in the country where that employment is exercised. Because the qualifying employment was exercised in India, the treaty allocated the taxing right to India too. The taxpayer's mistake was to read "where I am working now" into Article 15 when the Article is really asking "where was the work that produced this income done". On these facts the answer was India, so the treaty confirmed the domestic result instead of overriding it, and the Rs 20.45 lakh demand stood.

It is worth being honest that the order has critics. Commentators have argued that for a genuine non-resident, salary income, perquisites included, should not be taxable in India at all once the person has moved, and that the better remedy might have been a refund of tax wrongly recovered rather than a treaty fight the employee was always going to lose. There is also an unresolved factual question, flagged by several writers, about whether the UAE actually taxed any of this, since it levies no personal income tax, which means the "double taxation" the treaty exists to avoid was never really in play. None of that changed the outcome, and for planning purposes you should treat the source rule the Tribunal applied as the operating reality. But you should know the position is not as clean as a one-line headline suggests.

The sourcing rule, stated so you can actually use it

Here is the rule in the form you can apply to your own grant. An equity-compensation perquisite, whether you call it an ESOP, an RSU or an ESPP discount, is sourced to where you worked during the period between grant and vesting, because that is the period of service the award compensates. The perquisite is taxed in the financial year of exercise (RSUs) or exercise/allotment (options), but the amount India can reach is the amount attributable to Indian service across that earning period.

That single sentence has three consequences that pull in different directions, and the HDFC ruling only illustrates the first of them.

If you earned the grant entirely by working in India and then left, India taxes the whole perquisite even though you exercise as a non-resident. That is the HDFC fact pattern, and it is the expensive one.

If you earned the grant entirely by working abroad, with no Indian service in the grant-to-vest window, India has no source claim on the perquisite, regardless of whether your employer is Indian or where the shares are listed. An NRI in London who is granted RSUs by a US parent for work done in London owes India nothing on the vesting perquisite. The ruling does not touch this case, and you should not let a nervous preparer tax it.

If the grant-to-vest window straddled India and abroad, you apportion. Only the fraction of the perquisite that corresponds to Indian working days is India-sourced. This is where most real NRI careers actually sit, and it is where the money is won or lost.

Apportionment is by days worked, and the burden of proof is yours

The Tribunal in the HDFC case did not need to apportion, because the relevant service was wholly Indian. But the apportionment method the ruling implicitly endorses is well established. The Hyderabad ITAT in Anil Bhansali and the Mumbai ITAT in Unnikrishnan V S both held that where the earning period spans two countries, the perquisite is split in the proportion of days the employment was exercised in each country to the total days of the earning period. It is a day-count, not a guess.

Put real numbers on that. Take an NRI, call her Priya, granted RSUs by her US employer that vest evenly over a 48-month period. She worked in the Bengaluru office for the first 12 months of that period, then transferred to the New York office and spent the remaining 36 months there before the tranche vested and she sold. Suppose the perquisite on vesting, the fair market value on the vest date, works out to Rs 40,00,000.

India's source claim is 12 months out of 48, so 25%. The India-sourced perquisite is Rs 10,00,000, taxed in her hands at her applicable Indian rate. The remaining Rs 30,00,000 corresponds to New York service and is outside India's reach entirely. If she or her CA had instead treated the whole Rs 40,00,000 as Indian salary, which over-cautious filings routinely do, she would have offered an extra Rs 30,00,000 to tax for no legal reason and paid roughly Rs 9 lakh more than she owed at a 30% effective rate. The apportionment is not aggressive planning. It is the correct number.

Now flip Priya into the HDFC employee's shoes to see the trap from the other side. Suppose instead she had worked all 48 months in Bengaluru, vested, and only then moved to Dubai and exercised as a UAE resident. The whole Rs 40,00,000 is India-sourced, because every working day that earned the grant was Indian. Her Dubai residence on the exercise date buys her nothing, exactly as the Tribunal held. Had she exercised before leaving she would have paid the same Indian tax; leaving first changed her residence but not the source, and the only thing it added was the temptation to under-report and the penalty risk that follows.

The catch in both directions is evidence. The day-count is arithmetic, but you have to prove the abroad fraction, and the Assessing Officer starts from the assumption that an Indian-employer grant is Indian salary. That means the burden of showing you were working in New York or Dubai during the earning period sits on you. The documents that win this argument are the grant letter showing the grant date and the service it rewards, the vesting schedule, your relocation or deputation letter with the date you moved, your passport stamps or a day-count workbook covering the grant-to-vest window, and, ideally, a Tax Residency Certificate for the years abroad. Without them, a correct 25% position collapses into a 100% assessment, which is precisely how reasonable filings turn into demands.

Where the country you live in changes the answer

The source rule is uniform, but what you do with the India-taxed portion differs sharply by where you are resident, and this is the part generic coverage skips.

For a UAE resident, the HDFC case is the cautionary tale. The Gulf levies no personal income tax, so there is no foreign tax to credit and no foreign return to file the income on. That sounds like a saving, but it removes your safety net: every rupee India sources to Indian service is taxed in India and nowhere offsets it, and the treaty, as the ruling shows, will not exempt the India-worked portion. A Dubai-based NRI exercising an India-earned grant should simply expect to pay the Indian perquisite tax and plan cash for it.

For a US resident, the same India-sourced perquisite is also taxable in the US, because the US taxes its residents and citizens on worldwide income and will pick up the vesting income on the US side too. You avoid double tax by claiming a foreign tax credit for the Indian tax against your US liability, and on the Indian side you do the mirror image where US tax applies to abroad-sourced amounts. The mechanics, including the Form 67 filing that India requires before you claim relief, are in the foreign tax credit and Form 67 guide. The timing mismatch between the Indian financial year and the US calendar year is a recurring headache here and needs deliberate handling.

For a UK resident, broadly similar logic applies through the India-UK treaty and UK self-assessment, with the added wrinkle that the UK has its own rules for taxing securities options of internationally mobile employees, so the UK may itself apportion the gain by workdays. Two apportionment systems running over the same grant can produce gaps or overlaps, and that is exactly where a cross-border adviser earns their fee.

For a Canada resident, the stock-option benefit is taxable in Canada on a workday-apportioned basis as well, with a credit for Indian tax, so again you are reconciling two day-counts rather than one.

The through-line: only the UAE case leaves the Indian tax stranded with no foreign offset. For the US, UK and Canada, the real exposure is usually not extra tax but the administrative cost of proving the same number twice to two authorities, and the risk of getting the apportionment denominators inconsistent between them.

How this connects to the broader sourcing logic for NRIs

If the perquisite is taxed where the work was done, the capital gain when you finally sell the shares follows a different and simpler rule. The gain between the vesting price (your cost base, the FMV already taxed as perquisite) and the eventual sale price is capital gains, and for a non-resident that gain on foreign-listed shares is governed by your country of residence and India's treaty, not by the perquisite source rule. Do not let the two stages bleed into each other: the perquisite source is fixed by where you worked, the capital gains treatment by where you are resident when you sell. The interaction with India's capital gains regime, and the residency thresholds that decide whether you are non-resident or RNOR in the year of sale, sit in the capital gains guide and the residency and RNOR rules.

The ruling is also a reminder that the timing-versus-source distinction runs through NRI taxation generally. Section 17 fixing the taxing year at exercise is a timing rule; Section 9(1)(ii) fixing source by where service was rendered is a source rule. Most disputes NRIs lose come from collapsing the two, assuming that because the tax event happens in a year they were abroad, the income must be foreign. It is not. The event year and the source year are different questions with different answers.

Edge cases

Indian-company grants behave differently from foreign ones at the capital-gains stage. The source rule for the perquisite is identical, but shares of an Indian company are Indian assets, so the later capital gain is taxable in India regardless of your residence, while foreign-listed shares are not. An NRI holding vested HDFC or Infosys shares faces Indian capital gains tax on sale even as a non-resident; an NRI holding vested Google RSUs generally does not. The RSU and ESOP guide works this through.

The grandfathering of the timing rule across old years. The HDFC grant straddled a period when the Indian ESOP-taxation regime changed more than once, including the short-lived fringe-benefit-tax treatment for AYs 2008-09 and 2009-10. If you exercised very old grants, the year-specific rule matters, and the position your CA takes should match the law of the exercise year, not today's.

A genuinely abroad-earned grant from an Indian employer. An Indian company can grant options to an employee who is, throughout the earning period, working at an overseas branch or subsidiary. The employer being Indian does not make the perquisite Indian-sourced; the work location does. This is the most over-taxed case in practice, because TDS systems default to treating an Indian-employer grant as Indian salary. If this is you, the day-count and the documentation above are how you claim back what should never have been withheld.

Refund route when tax was over-withheld at vesting. Where an Indian employer deducted TDS on the full perquisite but only a fraction was India-sourced, the over-deduction is recovered by filing an Indian return and claiming the refund, the same plumbing covered for other over-withholding situations. Build the day-count file before you file, not after a notice.

The closing read

The honest read is that this ruling did not tighten the law; it punished a misreading of it, and the misreading is one I see NRIs and their preparers make in both directions. The HDFC employee lost because he believed his Dubai residence at exercise moved the income out of India's reach. It did not, because the income was earned by Indian work, and both the Act and Article 15 source it where the work was done. That is the expensive direction. The quieter and more common error runs the other way: an NRI who genuinely earned a grant by working abroad, or mostly abroad, lets an Indian-employer TDS default or a cautious CA tax the whole thing in India, and overpays by lakhs because nobody apportioned.

So for most NRIs holding equity comp across a relocation: do not ask where you live when you exercise, ask where you worked between grant and vest, and split by days. If the whole earning period was Indian, accept the Indian tax and plan the cash, especially as a UAE resident where no foreign credit will soften it. If part or all of it was abroad, claim the apportionment, but only if you can prove it, which means assembling the grant letter, vesting schedule, relocation date and a workday count before you file, because the burden is yours and a correct number with no evidence loses to a wrong number with a default. The exception who should pay for advice rather than rely on a guide is anyone with a multi-country earning period feeding into a US, UK or Canadian return, where two apportionment systems meet and the cost of an inconsistent day-count is real double tax.

Related guides

• RSU and ESOP taxation for NRIs: the sourcing rule that decides everything
• Capital gains tax for NRIs on Indian shares and mutual funds
• NRI residency and RNOR rules
• Foreign tax credit and Form 67
• DTAA relief for NRIs
• All Taxation guides
• All News and analysis

This guide is educational and general in nature. It is not individual tax advice. ESOP and RSU outcomes depend on your exact grant dates, vesting schedule, working locations across the earning period, residency in the year of exercise, and the treaty in force, and the ITAT order discussed here is a tribunal-level decision that may be appealed or distinguished on different facts. Confirm your specific position with a qualified chartered accountant or cross-border tax adviser before you exercise or file.