Regarding Perquisite Tax on ESOP - Unlisted Company

Perquisite tax on ESOPs for unlisted companies can be complex, especially when the holding company is based in the USA.

When an Indian employee exercises their ESOP option after quitting the company, the employer-sub-subsidiary company in India needs to ensure perquisite tax recovery.

Here's how: - *Taxation at Exercise*: When the employee exercises the ESOP option, the difference between the Fair Market Value (FMV) of the shares and the exercise price is considered a perquisite and taxed as income from salary.

 - *TDS Deduction*: As the employer, you need to deduct TDS under Section 192 of the Income-tax Act, 1961, on the perquisite value.

This TDS amount should be deposited with the government and reflected in the employee's Form 16. -

 *Tax Implications for Employee*: The employee will have to report the perquisite value in their income tax return and pay tax accordingly.

When the employee sells the shares, they will be subject to capital gains tax.

- *Compliance for Employer*: As the employer, you need to ensure that TDS is deducted and deposited correctly.

You should also provide the employee with a TDS certificate (Form 16) and report the TDS details in the quarterly TDS returns.

Regarding notifications or circulars from the government, you can refer to the Income-tax Act, 1961, and the rules and regulations issued by the Central Board of Direct Taxes (CBDT).

Sir . Thank You for the reply.

Thanks for the question and the resolution! This is extremely helpful.

I have another query related to this for the experts - 

Does the perquisite tax (the one that needs to be paid while excercising the ESOP) fall under Capital gains? 

Do I still need to pay this if I use the gains to buy a residential property?

Thanks

In ESOPs there are two components:

Perquisites and Capital gains.

Difference between Exercise price and average market price as on exercise date is considered perquisites and TDS at applicable slab rate is deducted.

Difference between average market price on exercise date and the selling price will become capital gains