QSBS exemption for NRI founders and startup employees

The QSBS exemption excludes up to 100% of gain on qualifying startup stock from federal tax, but only while you're a US taxpayer. Once you move to India, the IRS generally taxes none of a stock sale and India gives no QSBS relief. So your move date can matter more than the holding clock.

What the QSBS exemption covers after the 2025 law change

The Section 1202 exclusion, also called the qualified small business stock exclusion, lets an individual leave gain on qualifying startup stock out of federal income tax. The stock must come straight from a domestic C corporation that uses at least 80% of its assets in an active business. Stock in an Indian company never qualifies.

The Section 1202 exclusion tiers

How much you exclude depends on when you acquired the stock and how long you held it.

Whatever you can't exclude is taxed at up to 28%, not the usual 20% long-term rate. On a three-year sale that makes the top effective federal rate 14% before the 3.8% net investment income tax.

The dollar cap and the company tests

Your exclusion per company is capped at the greater of $15 million or 10 times your basis for stock acquired after July 4, 2025. Older stock gets the greater of $10 million or 10 times basis.

The company's gross assets can't top $75 million when it issues your shares, or $50 million for stock issued before July 5, 2025. Both dollar limits are indexed for inflation from 2027.

Health, law, finance, consulting, hotels, restaurants and farming are excluded trades, so check what your employer actually does.

How the QSBS holding period runs for options and shares

The clock starts when you acquire the stock, not when you join. Your equity type decides the start date:

• Stock options: the exercise date, so years of holding an unexercised option add nothing.
• Restricted stock with a timely 83(b) election: the grant date.
• Restricted stock without an election: each share's vesting date.
• RSUs: usually the settlement date.

Each option exercise is also tested separately against the gross-asset limit. A late exercise therefore starts your clock later and meets the company's gross assets at that later date.

What happens to the exclusion when you move to India

While you're a US taxpayer

The exclusion has no citizenship test. If you're an H-1B holder who passes the substantial presence test, or a green card holder, you file as a US resident and can claim it on the sale.

A green card keeps you in that group after you move, until you formally surrender it with Form I-407. Moving to India alone doesn't end your US tax status, and the rules to keep a US green card after moving decide how long the exclusion stays in play.

After you leave the US

Once you're a nonresident alien, the US generally doesn't tax your gain on US stock, so the exclusion has nothing left to exclude.

Section 871(a)(2) is the exception: if you're in the US for 183 days or more in the tax year, a 30% tax can reach US-source gains. That's why the year you leave needs a careful day count.

Giving up a long-term green card can also trigger the Section 877A exit tax, which treats your shares as sold the day before you leave.

What the same sale costs before and after the move

Arjun exercised options for $20,000 in March 2026, and the shares are now worth $520,000. Assume the company qualifies, and compare two sales in April 2030.

• As a US resident, 75% of his $500,000 gain is excluded, and the other $125,000 is taxed at up to 28%. That's up to $35,000 federally, before state tax and the net investment income tax.
• After moving to India in 2029 as an RNOR nonresident alien who receives the proceeds abroad, the IRS generally taxes none of the gain, and India taxes none of it either.

In the second case the exclusion never comes into play.

How India taxes the same sale

India has no equivalent of the exclusion. As a resident and ordinarily resident taxpayer, you pay 12.5% on a long-term gain on unlisted shares held more than 24 months, plus 4% cess, with no indexation. Shorter holdings are taxed at your slab rate.

During your RNOR years, India doesn't tax foreign income you receive abroad, and that includes a gain on shares of a US company. That's the one window where a sale can face tax in neither country, and how long your RNOR window lasts depends on your own day count.

Two other cases change the bill:

• While you're still an NRI living in the US, India doesn't tax a gain on US company shares at all.
• If you're a resident in India and the US excludes the gain, there's no US tax to claim as a credit, so India's tax is the full bill.

The capital gains rules for NRIs cover the Indian rates in more detail.

Why your state can still tax the gain

States set their own rules. California adds back all QSBS gain and Pennsylvania doesn't follow the federal rule, so both tax it in full. Illinois starts adding it back for 2026, while New Jersey begins allowing the exclusion for 2026.

Who this applies to

• If you're a US resident on an H-1B or green card, the exclusion applies when the company and the stock qualify, and the holding clock matters most to you.
• If you've left the US and sell later as a nonresident alien, the US generally taxes nothing, so your planning shifts to India's rules and your RNOR status.
• If you hold shares or ESOPs in an Indian company, QSBS doesn't apply, because the issuer isn't a domestic C corporation.
• If you're a US citizen or green card holder living in India, the exclusion still works, but India taxes the gain on top with no credit for US tax you never paid.

What to do before you sell

1. Ask the company for a QSBS eligibility letter and the gross asset figure at your issue date.
2. Write down the holding start date for every lot, by option exercise, vesting or settlement.
3. Lay your move date next to your likely sale date. If you'll be a nonresident alien and RNOR when you sell, the exclusion adds little, and I'd sell inside that window before chasing a longer holding clock.
4. Report a sale on Form 8949 with code Q in column (f) and the exclusion as a negative number in column (g), as the IRS instructions direct.
5. If you're a resident in India, declare the shares in Schedule FA on your Indian return.

Put three dates on one page

Before you exercise or sell anything, write down your exercise dates, your move date and your likely sale date. I'd do that first, because the order of those three dates decides whether the exclusion saves you anything. If you want a CPA to run the numbers across both countries, InvestMates can do that with you.