Compensation for reduction in ESOP value

Yes, Taxable...            

It means it shall be considered as perquisites or benefits under Section 17(2)(vi)

If I am not wrong,

Other issue is related to SAR award whether the are also considered to be perquisites benefits of taxes under head salary of capital gain

• The Madras High Court and some tax authorities take a view and consider the compensation a taxable perquisite under the “Salaries” head if paid due to employment and not linked to transfer of capital asset.

• When SARs are exercised and settled in cash, the payout is considered salary income taxed as a perquisite under section 17(2) of the Income Tax Act, and employers are required to deduct TDS under section 192.

• If SARs are settled by allotment of shares and the employee subsequently sells those shares, the gain arising from the sale (difference between sale price and market value at exercise) would be taxed as capital gains—but the initial value received at exercise (market value minus grant price) was already taxed as a perquisite.

Thank you sir for your prompt response 

You are welcome.             

In case SAR right are not exercised and relinquishment settled in cash what will be the correct treatment for taxation either as perquisites or capital receipt

Perquisites under Salary...

Compensation for a reduction in the value of an ESOP is not automatically exempt merely because it is described as compensation. If it is paid by the employer in connection with employment or the employee’s ESOP rights, it will generally be taxable as salary under section 17(1), and TDS under section 192 is appropriate. If the payment instead represents a genuine capital loss settlement or another non-employment payment, the treatment may differ; the agreement, payer and basis of compensation matter.

The ESOP terms and compensation agreement should show whether the payment replaces an employment benefit, settles a contractual claim, or compensates for a transfer or extinguishment of shares/options. This classification also determines the employee’s reporting and any potential capital-gains treatment; the fact that TDS was deducted under section 192 is relevant but does not, by itself, conclusively determine taxability.

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