Cost of acquisition

Under the Indian Income Tax Act, the cost of acquisition for shares received under an Employee Stock Option Plan (ESOP) is the Fair Market Value (FMV) on the date of exercise of the options.

This is the same value that was used to compute the "perquisite" value (taxable as salary income) at the time the options were exercised.

Summary of the Process

1. Stage 1: Exercise (Perquisite Tax)

   When you exercise your options and are allotted shares, the difference between the FMV on the exercise date and the exercise price you paid is treated as a taxable perquisite under the head "Income from Salary."

   • Formula: (FMV on Exercise Date - Exercise Price) × Number of Shares

2. Stage 2: Sale (Capital Gains Tax)

   When you later sell these shares, the profit is calculated under the head "Capital Gains."

   • Formula: Sale Price - Cost of Acquisition

   • Cost of Acquisition: For this calculation, you use the FMV on the date of exercise (the same value used in Stage 1).

Key Points to Remember

• Holding Period: For the purpose of determining whether capital gains are Long-Term or Short-Term, the holding period is calculated from the date of allotment of the shares, not the date of the original grant or exercise.

• Capital Gains Classification:

  • Listed Shares: Held for more than 12 months are considered Long-Term Capital Assets; otherwise, they are Short-Term.

  • Unlisted Shares: Held for more than 24 months are considered Long-Term Capital Assets; otherwise, they are Short-Term.

Summary: The cost of acquisition for ESOP shares is the Fair Market Value (FMV) on the date of exercise, as this is the amount already considered as a taxable perquisite.