Employee Stock Options Plans (ESOPs) and its different variants like Employees Stock Purchase Plans, Stock Appreciation Rights, Stock Awards, etc, have been used by employers to attract, retain and motivate employees. ESOPs have been popular primarily in the knowledge-based industries like information technology, biotechnology, etc. However, in the recent past, they have gained prominence even in traditional industries like manufacturing.
The tax law relating to the taxability of ESOPs has been changing and has evolved over a period of time from perquisite taxation to fringe benefit tax (FBT) and now back to perquisite taxation. It is important to understand the distinction between the event of taxability under the erstwhile FBT vis-à-vis the new perquisite rules as there is a significant difference between the two.
Fringe Benefit Tax (FBT)
Under the FBT regime, which was effective till March 31, 2009, the benefit arising to the employee under the stock option plan being the difference between the fair market value (FMV) of the ESOPs on the date the option vests with the employee and the amount actually paid by or recovered from the employee was considered to be the fringe benefit and was accordingly liable to tax.An option was available to the employer either to pay the FBT on its own or to recover the same from the employee, subject to the terms and conditions under the stock option agreement.
perquisite rules
Under the perquisite rules, it is important to note that the trigger for taxability has shifted from the date when the option vests to the date when the option is exercised. Thus, effective April 1, 2009, the benefit arising to an employee being the difference between the fair market value on the date on which the option is exercised less the amount actually paid or recovered from the employee would be subject to tax as part of the salary income.
Thus, an employer is required to compute the benefit under the stock options, include the same as part of the salary income and accordingly withhold the tax on the same from the employee.
Fair Market Value (FMV)
In case the shares of a company are listed on a recognised stock exchange, the FMV is to be determined as the average of the opening price and the closing price of the share on that date. In case the shares are not listed on the recognised stock exchange, the FMV is to be determined by a merchant banker as specified under the perquisite rules.
Capital gains
The next event of taxability under the stock options would arise in the event of sale/transfer of shares. The difference between the sales consideration and the fair market value on the date of exercise would be treated as capital gains and subject to capital gains tax. The capital gains could be long-term or short-term, depending upon the period of holding of such shares/securities.
Certain open issues
It is possible that on the date of exercise, the employee may not have sufficient cash with him to pay the tax liability. However, as the employer is under an obligation to withhold tax, the same may be done either by withholding the amount from the salary income or by disposing off the specified number of shares to meet the tax liability, subject to the terms and conditions under the plan.
Further, certain clarifications were provided under the FBT regime in respect of taxability of the benefit arising under ESOPs in case of employees who have worked in India and overseas. Similar clarifications should be provided under the perquisite taxation rules as there are still lots of areas which require clarification, especially in case of individuals whose residential status is non-resident/not ordinarily resident and who have worked overseas during the period of the ESOP.
By Vikas Vasal Executive Director, KPMG.
(Republished With Amendments)
Hi,
Can you please give me the source for the information posted here, urgently 🙂
It is very important
Thank you.
As an executive of a US company, based in India, my husband has been given an amount of Esops (Non qualified Stock Option) and RSUs.
The issue is for the Esops as it has been given – free. How are we going to be taxed?
ex: $10/share – 1000 shares.
If i understand well the taxable value for esop is the difference between the fair market value and the exercise price by the employee. But how does it work when we did not buy those shares? Thanks a lot.
I am a employee of a Belgium co and in 2011 co has given 1112 Warrants which is listed in belgium with a price of 5.6 Euro ,locking period 3 years as comoany acquired by another company in 2012, the company converted the warrants into shares in dec 2012 and paid diff price from belgium. is this taxable as short term or long term.
Sir,
I am a employee of a french co and in 2008 co has given 1315 share which is listed in europe, free of cost ,vasting period till dec’10 I have exercise the option in June’11 and got 2276 shares and got the money in india from france.
I have been deducted by 30% tax on that . can you pls guide?
with best regards – Prem thakur
This is a case of allotment of shares under ESOP guidelines by a listed company to an NRI employee. The following queries may please be addressed:
1. The difference between the exercise price and the fair market price on date of allotment would be regarded as perquisites. Will this be taxable under the head salary. 2, If the NRI employees sells the shares in Indian market, what is the TDS/withholding tax impact on the Company which has alloted the shares, authorised dealer making the payment and the share broker who has contracted on the amount of short/long term capital gain that has incurred.
IS Stock option perquisite and taxable?
I want to clarify whether the below 2 points are correct or wrong?
Stock Options value will displays in Form16 separately in this section [(b) Value of perquisites under section 17(2)]? Or it will include in Gross Salary?
And also Stock Options value will Displays in Form12ba in the 16 columns. [Stock options (non-qualified options)]?
My Question is where should show the Stock options value in Form16 and Form12ba?
Thanks for the information. Just wanted to know what will be the liability for the employer (TDS) or the employee, incase the employee quits in between the ESOP scheme and there is bunch of un-vested, un-exercised options. Does the liability arise?
Thanks.
Aniket
The perquisite tax will be deducted & paid by the company based on Fair Market Value and the allotee can sell the same after crediting the ESOPs into his account. Immediately after allocating if he sells & the share price goes up he needs to pay short term capital gains tax. If he sold below the FMV, then how the diffence in Tax paid for the actually realized amont through the sale’s will be reimbursed with respect to loss. No answer