Whether compensation paid for reduction in ESOP value is taxable or not tds deducted under 192 for the said payment
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Quick Summary
This discussion clarifies the tax implications of compensation received due to a reduction in Employee Stock Option Plan (ESOP) value. It confirms that such compensation is generally taxable and subject to TDS under Section 192, often treated as a perquisite under Section 17(2)(vi). The treatment of Stock Appreciation Rights (SARs) is also detailed, explaining that cash settlements are taxed as salary perquisites, while share settlements may lead to capital gains tax on subsequent sales after the initial perquisite taxation.
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.
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