For India tax, your ISO cost basis is the exercise-date fair market value in Box 4 of Form 3921, the AMT figure, not the strike price. Copy the strike price from your 1099-B and you pay Indian tax on a gain you never made. The awkward case is when India never taxed your exercise.
Why your US forms show two different ISO cost bases
An incentive stock option (ISO) lets you buy employer shares at a fixed strike price. When you exercise and hold, the US charges no regular income tax on the gap between the strike price and the market value that day. That gap, the spread, still counts for the alternative minimum tax (AMT).
So the US gives the same shares two cost bases, and you need to know which is which before you open an Indian return.
What the US records at exercise
- Regular tax basis: the strike price you paid. If you hold long enough for a qualifying disposition (more than two years from grant and one year from exercise), the whole gain above the strike price is long-term capital gain.
- AMT basis: the fair market value on the exercise date. The spread was added to AMT income on Form 6251 in the exercise year, so AMT counts it as already taxed.
- Disqualifying sale: if you sell early, the spread becomes ordinary wage income and your regular basis rises to the exercise-date value.
That AMT can also eat into credits you assumed would protect you, which is how the AMT foreign tax credit gets refigured on a separate Form 1116.
Where to find the exercise-date value
Your employer reports each ISO exercise on Form 3921. Box 3 is the exercise price per share, Box 4 is the fair market value per share on the exercise date, and Box 5 is the number of shares. Box 4 is the number India cares about.
Your broker's 1099-B usually reports the strike price as basis, because that's the regular-tax figure. It's correct for the US return and wrong for the Indian one.
How India sets ISO cost basis: the exercise-date value
India has no ISO concept and treats the exercise like any employee stock option. The spread is a salary perquisite under Section 17(2)(vi) of the Income-tax Act, 1961. It's valued at the exercise-date market value minus what you paid.
Section 49(2AA) then fixes your cost for capital gains as the fair market value "taken into account" for that perquisite. The Income Tax Department's own note on ESOP taxation says the same thing: the exercise-date value is the cost of acquisition, and the holding period runs from the date the shares were allotted.
Foreign shares held more than 24 months are taxed at 12.5% as long-term gains under Section 112, with no indexation. Held 24 months or less, the gain is short-term and taxed at your slab rate.
You exercised while already living in India
This is the clean case. India taxed the spread as salary in the year you exercised, through payroll or your own return. Using the exercise-date value as cost simply stops India from taxing that same spread a second time when you sell.
You exercised while you were still in the US
You were a non-resident of India at exercise, India taxed no perquisite, and now you're resident and selling. Was the exercise-date value ever "taken into account"? My position, and the one I file on, is yes: use the Box 4 value.
Section 49(2AA) asks only that the value was used to measure the perquisite, not that India collected tax on it. In Rajesh R. Hemrajani v. ITO (ITA No. 1284/Mum/2025), the Mumbai bench of the Income Tax Appellate Tribunal accepted that reading for a non-resident taxed abroad.
Be honest with yourself about the risk. It's a tribunal ruling, not a Supreme Court one, and there's no CBDT circular on this fact pattern. An assessing officer could still argue for the strike price, so I disclose the basis method in the return rather than leave it to be discovered.
Common mistake: assuming your cost resets to the market value on the day you became resident. It doesn't. Section 55(2) lists the cases where cost can be substituted, and a change of residence isn't one of them.
What using the strike price costs you
Priya exercised 1,000 ISOs at a $10 strike price while working in Seattle. The share price that day was $60, so her Form 3921 shows a $50,000 spread. She moved back to Bengaluru, became a resident and sold all 1,000 shares three years after exercise at $100.
| Return | Cost basis used | Gain in dollars |
|---|---|---|
| US regular tax (if she still filed a US resident return) | $10 strike price | $90,000 |
| US AMT | $60 exercise-date value | $40,000 |
| Indian ITR, correct | $60 exercise-date value | $40,000 |
| Indian ITR, copied from 1099-B | $10 strike price | $90,000 |
Copying the 1099-B figure adds $50,000 of phantom gain to her Indian return. At the 12.5% long-term rate that's about $6,250 of extra tax before surcharge and cess, and the actual rupee figure will depend on the conversion rates applied to her cost and sale price.
Who this applies to
This matters to you if you hold ISO shares from a US employer and you're filing, or will file, an Indian return as a resident (ROR) when you sell. It also applies if India taxed the exercise because you were already resident then.
It does not touch you if:
- you sell while still a non-resident of India, because India doesn't tax your foreign-source capital gains then;
- you sell while RNOR, since foreign-source gains generally stay outside Indian tax in that window;
- you never exercised, because unexercised options have no cost basis to argue about.
Nonqualified options and RSUs follow the same Indian rule, though the US side differs. For RSUs, see how RSUs are taxed across both countries.
What to do before you file your ITR
- Pull every Form 3921 for the shares you sold, and match each lot to its exercise date and Box 4 value.
- Ignore the basis on the 1099-B for the Indian return, and keep it only for your US Form 8949.
- Convert cost and sale proceeds to rupees using the rate your CA applies, and keep the working.
- Report the sale in Schedule CG, and list the shares you still hold in Schedule FA while you're resident.
- If you also paid US tax on the gain, file Form 67 before the ITR due date, or India refuses the credit.
- If you exercised while a non-resident, ask your CA to disclose the Section 49(2AA) basis in the return.
Sales on or after 1 April 2026 fall under the Income-tax Act, 2025, which replaced the 1961 Act. The section numbers changed, so confirm the matching cost provision with your CA before citing it.
Get your Form 3921s before you file
Before you file this year's ITR, collect your Form 3921 for every exercise and put the Box 4 value against each lot you sold. If any of those exercises happened while you lived in the US, I'd have a cross-border CA review the basis method before filing, and InvestMates can do that review with you.
Frequently asked questions
Do you have to pay AMT on ISOs?
Not always. Exercising and holding ISOs adds the spread to your AMT income on Form 6251, and you owe AMT only if that pushes your tentative minimum tax above your regular tax. Any AMT you do pay can come back later as a credit on Form 8801.
Is ISO cost basis the same as fair market value for India tax?
Yes, for Indian capital gains your ISO cost basis is the fair market value on the exercise date under Section 49(2AA). The US regular-tax basis is the strike price instead, so your two returns will show different gains on the same sale.
Are ISOs taxed twice by the US and India?
ISO income isn't taxed twice on the same gain if you use the right cost basis and claim credits where both countries tax. If you're still a US tax resident when India taxes the same income, the US credit for Indian tax goes on Form 1116.
Do ISO shares get a new India cost basis when you become a resident?
No, becoming a resident of India doesn't step up the cost of ISO shares you already hold. Your cost stays the exercise-date value, and the only way to change it is an actual sale and repurchase, which is the idea behind an RNOR cost basis reset.