There is no gift tax on Sweat Equity, but it will attract Capital Gains Tax as per the foregoing provisions of the Income Tax Act.
As it is issued by a Company to its employees, does this fall under the charging section of Salaries?
The perquisite value which arises out of issuance of stocks under an Employees Stock Option Plan or Scheme shall not be taxed, if
(a) the Plan or Scheme conforms to the ‘SEBI Guidelines’.
SECURITIES AND EXCHANGE BOARD OF INDIA (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999
(b) a copy of the Plan or Scheme is furnished to the Commissioner of Income tax having jurisdiction over the Assessee.
(c) the conditions contained in the Plan or Scheme are not ‘changed’.
How does it get charged under the Capital Gains?
S. 47 lists transactions not regarded as transfer, but the proviso to clause (iii) of the section, specifies that the transfer of a capital asset in the form of ESOP, when transferred under a gift or will, shall attract capital gain. Such transfers are excluded from the exemption granted by the substantive portion of the clause. Additionally, the 4th proviso to S. 48, read with the proviso to S. 47(iii), specifies that if ESOP are gifted, the market value on the date of the gift, would be considered as the sale price on which the transfer of the ESOP would be taxed.
3. S. 49(2AA) specifies that where the capital gain arises from the transfer of the shares, the value of which has been taken into account while computing the value of perquisite under clause (2) of S. 17, the cost of acquisition of such shares shall be the value under that clause.