Taxability in case of issuing shares to emplyees

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

07 October 2015 Hello,

My client is a Pvt. Ltd. Co. has high labour turnover is thinking to allot some shares to its employees without consideration in order to retain them.
Please guide me on the taxability to both Co. and employees under the said scenario asap.

Thanks

Querist : Anonymous

Querist : Anonymous (Querist)

14 October 2015 Please reply..

Querist : Anonymous

Querist : Anonymous (Querist)

11 December 2015 Please reply.....

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Hey! Here’s a clear rundown on the tax implications when your Pvt. Ltd. company issues shares to employees **without consideration** (i.e., free shares or at a discount):

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### 1. **Taxability for Employees**

* **Shares issued without consideration or at a discount** to employees are treated as **perquisite** under **Section 17(2)(vi)** of the Income Tax Act.
* The **fair market value (FMV)** of the shares on the date of allotment, **minus any amount actually paid by the employee**, is taxable as **salary income** in the hands of the employee.
* This amount is added to the employee’s salary and taxed as per applicable slab rates.
* The employer is required to **deduct TDS** on this perquisite value under **Section 192**.

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### 2. **Taxability for the Company**

* For the company, issuing shares to employees **without consideration** or at a discount is **not treated as income**.
* However, the company should disclose the **perquisite value** given to employees as part of employee remuneration in its books.
* If shares are issued at a discount, the difference (discount) is considered a **perquisite** for the employee but **not taxable income** for the company.

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### 3. **Other points**

* The valuation of shares should be done based on **Fair Market Value (FMV)** determined as per the prescribed method under **Rule 11UA of Income Tax Rules** (usually based on book value or valuation by a merchant banker).
* If shares are part of an **ESOP (Employee Stock Option Plan)** or **equity-based compensation**, there may be additional reporting requirements.
* On **subsequent sale** of shares by employees, **capital gains tax** will apply based on sale price minus FMV on allotment date.

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### Summary Table:

| Party | Taxable Event | Tax Treatment | Section Reference |
| --------------------- | ------------------------------------ | ------------------------------------------------------- | ----------------- |
| Employee | Allotment of shares at discount/free | Perquisite value = FMV – amount paid, taxable as salary | Section 17(2)(vi) |
| Employer | Allotment of shares | No income, but disclose in books | N/A |
| Employee (later sale) | Sale of shares | Capital gains tax on sale | Sections 45, 48 |

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If you want, I can help you draft a note for your client explaining this with steps for compliance. Would you like that?

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