Taxability of ESOPS

What are Stock Options?

Employee Share Options Plan is the option that a company provides to its employees to purchase the company’s shares on future dates at a pre-determined price. It is popular these days and many a times part of salary offer given to newly hired executives

Employee Stock Option Plans are taxed at 2 points:

1. As a perquisite- at the time of Exercise of ESOPs, i.e., when the employee actually purchases shares in the company/startup

2. As capital Gain when Sale of Such shares By Employee.

In Addition We Will Deal A Case Where The Shares Allotted Are Sold Belong To A Company

  • Company Listed In India
  • Listed Outside India (Provision of DTAA Comes into Force)

A)  AS A PERQUISITE- AT THE TIME OF EXERCISE OF ESOPS

Whenever an employee receives a sweat equity shares, the value of such shares will be taxable as a perquisite under the head Salaries as per section 17(2)(VI) of Income Tax Act, 1961.

Question arises that how to value the perquisite?

Value Of Perquisite :

FMV OF SHARES (EXERCISE DATE ) (Rule 3(8)(i) of Income Tax Rules 1962) XXX
Less : AMOUNT PAID RECOVERED BY EACH EMPLOYEE (XXX)
AMOUNT TAXABLE AS PERQUISITE XXX

Obligation of Employer

The Calculation of TDS will be Also Revised for the purpose of giving Effect to Inclusion of Amount as perquisite. The employer shall also indicate the same in Form 16 as well as Form 12BA.

B) TAXABILITY AS CAPITAL GAIN WHEN SALE OF  SUCH SHARES BY EMPLOYEE.

When Employee Sells Such  Shares Which Were Allotted To Him Under Employee Stock Option Plan , Tax Is Levied On Any Amount Of Profits Or Gains Arising From Such Transaction, Since These Are Regarded As Transfer And Chargeable To Tax Under Head Capital Gain Under Section 45 Of Income Tax Act 1961. Such Profit Is Taxable Under The Head ‘Capital Gains’.

Period of Holding: It shall be reckoned from the date of allotment or transfer of such equity shares
Cost of Acquisition : It shall be the FMV value as computed for the determining the perquisite as mentioned above (Salaries) under section 17(2)(vi)

Type of Capital Gain on the Basis of Period Of Holding as short term or long term

Particulars Short Term Less Than Equal to Long Term More than
When the Shares are listed on Recognized Stock Exchange in India 12 Months 12 Months
When the Shares are Not  listed on Recognized Stock Exchange in India (Foreign Stock Exchange Covered Here) 24 Months 24 Months

In case The Sale of  Shares Issued are Listed In a Stock Exchange outside India  Say USA

Following Questions

  • What will be the Tax Treatment?
  • Will the Income be Taxed In USA or India?
  • Will it Be Double Taxed?

Let us take a Case where the Shares issued are Listed in NASDAQ ,USA

Here The Double Tax Avoidance Agreement Between USA and India , will Come Into Force Under Section 90 , 90A of the Income Tax Act , 1961.

As there is DTAA with the US, then Tax Relief can be claimed u/s 90.

As per DTAA  BETWEEN USA AND INDIA

ARTICLE 13

GAINS

Except as provided in Article 8 of this Convention, each Contracting State may tax capital gains in accordance with the provisions of its domestic law.

Article 8 of the DTAA says that Each Country shall tax as per Domestic Laws.

ARTICLE 25(2)(a)

RELIEF FROM DOUBLE TAXATION

2. (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall

  • allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States,
  • whether directly or by deduction.
  • Such deduction shall not exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States. 

From Above We Can Conclude that It will be taxable In Both of the Countries , how ever a Relief ( Credit ) will be granted which will be

Lower of

  • Tax Already Paid in USA on such Income
  • Tax Payable in India on such Income

And Accordingly Form 67 with the details of Foreign income and Tax Paid shall be furnished. Certificate or Statement specifying the nature of income and the amount of Tax deducted therefrom or Paid by the Assesse is also from any of the following

  • From the tax authority of the country outside India
  • From the person responsible for deduction of Such tax
  • By the assesse

Statement shall be accompanied by Proof of Deductions

My fellow members correct me if I’m wrong.

The author can be reached at basrasushant@gmail.com 

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