An Employee Stock Option Plan (ESOP) is a benefit scheme that grants employees the right to purchase company shares at a predetermined price. However, failing to report it correctly in income tax filings can lead to steep penalties. A recent case involving Kishore Kumar Rajagopal highlights just how costly such a mistake can be—and how taxpayers can avoid similar errors.
Kishore Kumar Rajagopal faced a Rs 10 lakh penalty after failing to disclose ESOPs received during his tenure with the UK arm of his group company. While filing his income tax return (ITR) for Assessment Year 2016–17, he did not report these holdings under Schedule Foreign Assets (FA), a mandatory disclosure section for overseas financial interests.
The omission triggered action under Section 43 of the Black Money Act (BMA), which imposes strict penalties for undisclosed foreign assets, as per a report by the Economic Times.
Why was the penalty imposed?
Rajagopal challenged the penalty before the Commissioner of Appeals (A) and then moved the Income Tax Appellate Tribunal (ITAT) Chennai, arguing that the lapse was “purely accidental.” His representative, Chartered Accountant Prakash Shridhar Hegde, stated that the ESOP-related taxes had already been deducted at source (TDS), and capital gains from their eventual sale were properly declared in a later assessment year (AY 2019–20). This, he argued, demonstrated that there was no intent to evade taxes.
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The Income Tax Appellate Tribunal (ITAT) in Chennai agreed. In its ruling on April 1, following a hearing on March 24, the tribunal observed that the transactions were already within the tax system. It concluded that the non-disclosure was a one-time lapse caused by a lack of clarity, rather than deliberate concealment of assets, particularly since the reporting requirement was relatively new at the time.
Taking into account the bona fide nature of the error and the lack of deliberate concealment, ITAT Chennai struck down the Rs 10 lakh penalty.
What Taxpayers Need to Know
Under Indian tax rules, Schedule FA requires the disclosure of all foreign assets and financial interests located outside India by a beneficiary, trust, bank signatory, or other parties with a financial interest in abroad-based entities. This applies to individuals filing ITR-2 or ITR-3, including salaried taxpayers with overseas holdings.
Assets that must be reported include:
- Shares held outside India, including annuities, debentures, capital assets, ESOPs, insurance, and immovable property, as well as any beneficial or financial interest in an overseas entity.
- Signing authority in any account located outside India (trading, depository, bank, or custodian account).
It mainly applies to Indians who work abroad, invest abroad, or have income from any source outside India (dividends, interest, or capital gains).
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Budget 2026 offers a way out for compliance
In an effort to encourage compliance, Finance Minister Nirmala Sitharaman has proposed a one-time six-month window under the Budget 2026 framework. The scheme, called the Foreign Assets of Small Taxpayers—Disclosure Scheme (FAST-DS), offers taxpayers an opportunity to declare previously undisclosed foreign assets or income. The Centre is yet to announce when the six-month timeline will begin. Two categories are proposed:
- Category A: This includes amnesty for those who have not disclosed foreign income or assets exceeding Rs 1 crore. These individuals need to pay 30 percent of the asset's fair market value (FMV) or 30 percent of undisclosed income as tax, plus an additional 30 percent tax, to receive immunity.
- Category B: This applies to cases where tax on foreign income was paid but assets were not disclosed. The value of such assets should be below Rs 5 crore, and the taxpayer has to pay a Rs 1 lakh penalty to achieve compliance.
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