A US startup has three practical paths to reward an India-based team member: grant US stock options or RSUs directly from the US parent, grant equity through an Indian subsidiary's own ESOP plan, or use phantom stock — a cash-settled contract that tracks share value without issuing any actual shares. The right choice turns on whether the recipient may relocate to the US, how much administrative and regulatory friction the founder can absorb, and the very different India tax treatment each option carries.
"Equity" is not one instrument. A US parent can grant its own stock options or restricted stock units (RSUs) directly to an India-resident person. If the company has an Indian subsidiary, that subsidiary can run its own ESOP plan under Section 62 of the Companies Act, 2013, granting options in the Indian entity. Or the company can step outside share issuance entirely with phantom stock — a contractual, cash-settled instrument that pays the recipient an amount tied to share value at a defined event. Each reaches the same business goal of aligning an India-based team member with the company's success, but each lands very differently under India's tax and exchange-control regimes. Gurpreet S. Bal's consistent observation is that founders pick the instrument first and discover the regulatory consequences second, when the cleaner sequence is the reverse.
Issuing real US-parent shares to a person resident in India brings the grant inside FEMA's foreign-share-holding framework, requires the employee to fund the exercise price in dollars under the Liberalised Remittance Scheme, and triggers India tax as a salary perquisite at exercise even though the shares are illiquid. The upside is real ownership and capital-gains treatment on later sale; the cost is regulatory and cash-flow friction the employee often cannot easily manage.
Direct US equity is not prohibited, and for some recipients it is the right answer — but it carries friction founders routinely underestimate. When an India-resident employee exercises a US option, India treats the spread between fair market value and the strike price as a perquisite — ordinary salary income taxed in the year of exercise — even though the shares are private and unsellable. The employee owes real tax on paper value. Funding the exercise price involves remitting dollars abroad under the RBI's Liberalised Remittance Scheme, which carries an annual cap and its own reporting, and holding foreign shares creates ongoing FEMA reporting obligations for the individual. None of this is fatal, and the payoff — genuine ownership and capital-gains treatment when the shares are eventually sold — can justify the friction for a senior co-founder or executive who may one day relocate to the US. For an engineer who will likely never leave India, the same structure is often more burden than benefit. Gurpreet S. Bal frames it as a question of fit: real equity rewards the person who will participate in the company's ownership story, not merely its cash success.
Phantom stock is a contractual promise to pay cash equal to the value (or appreciation) of a notional number of shares at a defined event such as an exit or liquidity round. No shares are issued, so there is no FEMA share-issuance route to clear, no strike price for the employee to fund, no dilution of the founder's cap table, and the plan can cover advisors and consultants who could not receive a statutory ESOP. That simplicity is why founders with India-based teams gravitate to it.
Phantom stock — sometimes structured as stock appreciation rights — is a contract, not a security. The company promises that, at a defined trigger such as an acquisition, secondary sale, or specified date, it will pay the recipient cash equal to the value of a stated number of notional shares, or to the appreciation since grant. Because no shares change hands, several hard problems disappear: there is no FEMA approval route for issuing foreign shares to an India resident, no exercise price to fund in dollars, and no dilution of the founder's actual cap table. It is also more flexible on eligibility. India's statutory ESOP regime under Section 62(1)(b) of the Companies Act is limited to employees and directors, but phantom stock, as a pure contract, can be granted to advisors, fractional executives, and consultants outside that definition. For a founder who wants to reward a distributed India-based team quickly without standing up a full Indian ESOP plan, this administrative simplicity is the central attraction.
In India, a phantom stock payout is taxed entirely as ordinary salary income — a perquisite under Section 192 — with TDS withheld at the recipient's salary rate. Unlike real shares, there is no capital-gains treatment, so the recipient cannot access India's lower long-term capital-gains rates on any of the value. For non-employee advisors the payout is professional income with TDS at 10% under Section 194J. The recipient gets cash certainty but loses the favorable tax rate that actual equity could have provided.
This is the trade-off to understand before defaulting to phantom stock as the "easy" option. Because a phantom payout is cash and not the sale of a capital asset, India taxes the entire amount as ordinary income. For an employee it is a salary perquisite under Section 192, with tax deducted at source at the employee's marginal salary rate; there is no holding-period benefit and no long-term capital-gains rate available on any portion. For a non-employee advisor or consultant, the same payout is professional income with TDS at 10% under Section 194J rather than salary withholding. The practical consequence is that two recipients receiving identical economic value — one through real shares held to a qualifying period, one through phantom stock — can face materially different tax outcomes. Gurpreet S. Bal's point is not that phantom stock is wrong, but that its simplicity is purchased partly with the recipient's tax efficiency, and that trade should be made consciously.
A payout to an India-resident recipient is received and taxed in India, and where it sits in an NRO account, repatriation abroad is subject to the USD 1 million annual limit under the RBI's Liberalised Remittance Scheme. Where a foreign parent funds payouts to employees of its Indian subsidiary, the arrangement must be structured under transfer pricing rules in Section 92 of the Income Tax Act so the cost allocation between entities is defensible.
Even though phantom stock avoids the share-issuance side of FEMA, exchange control does not disappear once cash crosses borders. A payout to a recipient resident in India is received and taxed there; where the funds land in an NRO account, repatriating them out of India is subject to the USD 1 million per financial year limit under the RBI's Liberalised Remittance Scheme guidelines. More importantly for the company, when a foreign parent funds phantom payouts to employees of its Indian subsidiary, the cost allocation between the two entities sits squarely within India's transfer pricing regime under Section 92 of the Income Tax Act. The arrangement must be documented so the charge between the Indian subsidiary and the US parent reflects an arm's-length allocation. Gurpreet S. Bal has seen cross-border phantom plans designed cleanly on the equity side that nonetheless created a transfer-pricing question because nobody decided, up front, which entity bears the cost of the payout.
The India-US Double Taxation Avoidance Agreement lets a recipient offset tax paid in one country against liability in the other through the Foreign Tax Credit, so the same income is not taxed twice. Because phantom payouts are ordinary income in both jurisdictions, careful coordination of when income is recognized and where the person is tax-resident at payout matters a great deal — and is exactly the kind of fact-specific analysis a cross-border tax advisor should run before the plan is adopted.
For founders and recipients who touch both tax systems, the India-US Double Taxation Avoidance Agreement (DTAA) is the mechanism that prevents the same dollar from being taxed twice. A recipient who pays tax on equity income in one country can generally claim a Foreign Tax Credit against the corresponding liability in the other. The complication is timing and residency: phantom payouts are ordinary income in both jurisdictions, so when the income is recognized in each country, and where the person is tax-resident at the moment of payout, determine whether the credit lines up cleanly or leaves a gap. A recipient who moves between the US and India during the life of the award — common for the long-tenured, mobile founders and executives in this community — can face a genuinely intricate analysis. This is fact-specific enough that it should be run by a qualified cross-border tax advisor for the individual, not resolved by a rule of thumb.
If the recipient may relocate to the US or you want them to have genuine ownership and capital-gains upside, real options or RSUs can be worth the regulatory friction. If the recipient will stay in India and you value simplicity, cash certainty, no dilution, and the ability to cover advisors, phantom stock is often the cleaner fit despite losing capital-gains treatment. Many founders end up with a hybrid — real equity for senior leaders who may move, phantom stock for the broader India-based team.
There is no single right answer, and Gurpreet S. Bal generally resists the founder instinct to standardize on one instrument for everyone. The decision is better made recipient by recipient against a few factors. Is this person likely to relocate to the US, where real ownership and capital-gains treatment become genuinely valuable? Then direct options or RSUs may justify the FEMA and LRS friction. Is this person a long-term India-based engineer, advisor, or consultant who values cash certainty and will probably never sell foreign shares? Then phantom stock's simplicity — no share issuance, no exercise funding, no dilution, broad eligibility — often outweighs the loss of capital-gains rates. RSUs sit in between, removing the exercise-funding problem while still conferring real shares. In practice many cross-border companies run a hybrid: real equity for senior leadership who may move and want ownership, phantom stock for the broader distributed team where administrative simplicity and cash certainty matter most. The instrument should follow the person and the tax reality — not the other way around.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on SAFE financings, venture capital rounds, mergers and acquisitions, acquihires, and IPOs. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Prior to his career as a corporate lawyer and transaction advisor, he served with the U.S. Department of Justice and as an international and cross-border tax advisor at a Big 4 accounting firm.