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Taxation on one time payment for not exercising ESOP

Lokesh (Student) (26 Points)

26 February 2024

Company offered a one time payment to not exercise ESOPs. At the time of offer and payment, the person had not been employed by the company for > 1 year. He had started freelancing. How will this payment be taxed?

Confused between:

business income
income from other sources
profits in lieu of salary (Salary income head)
others? please suggest!

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5 Replies

sabyasachi mukherjee (26067 Points)
Replied 27 February 2024

Whst is the gross total income.

Lokesh (Student) (26 Points)
Replied 28 February 2024

Around 8.3 Lakhs for FY23-24

Yasaswi Gomes new (Finance ) (4479 Points)
Replied 29 February 2024

If the payment is not related to business income but is a one-time receipt, it may be considered income from other sources.

Lokesh (Student) (26 Points)
Replied 29 February 2024

Will normal indexation taxation apply to it?

What about Salary in lieu of profits? According to this https://fi.money/blog/posts/understanding-profit-in-lieu-of-salary-a-comprehensive-guide:

"Profit in lieu of salary specifically includes any sum received from a current or previous employer as compensation for termination of employment or modification of terms and conditions of employment. If the employee received any amount, whether in a lump sum or otherwise, from any person before joining or after cessation of employment, such income is also considered as profits in lieu of salary."

Yasaswi Gomes new (Finance ) (4479 Points)
Replied 29 February 2024

Let’s break down the tax implications for the one-time payment related to not exercising Employee Stock Options (ESOPs) and also discuss “profits in lieu of salary”:

Taxation of One-Time Payment for Not Exercising ESOPs:
- The one-time payment received for not exercising ESOPs is generally taxed based on the difference between the Fair Market Value (FMV) of the shares on the exercise date and the exercise price (the price at which the employee can buy the shares).
- This difference is considered a perquisite and is taxed as part of the employee’s salary income.
- The employer deducts TDS (Tax Deducted at Source) on this perquisite, and it is reflected in the employee’s Form 16.
Profits in Lieu of Salary:
- “Profits in lieu of salary” refers to additional compensation received by an employee beyond their regular salary.
- It includes any sum received from a current or previous employer as compensation for termination of employment or modification of terms and conditions of employment.
- Examples of such payments include amounts paid on retirement, premature termination, resignation, or other circumstances.
- These payments are taxable under the Income Tax Act and must be declared while filing the income tax return.
Other Payments Considered as Profits in Lieu of Salary:
- Any other payment made by an employer to an employee can also be considered as profits in lieu of salary.
- This comprehensive provision covers all payments made by an employer to an employee, whether made in pursuance of a legal obligation or voluntarily.
Exemption Under Section 10:
- Certain payments are exempt from being considered profits in lieu of salary under Section 10 of the Income Tax Act.
- These include:
  - Death cum retirement gratuity
  - Commuted value of pension
  - Retrenchment compensation received by a workman
  - Payment received from a statutory provident fund

Remember that tax laws can be complex, and individual circumstances vary. It’s advisable to consult a tax professional or chartered accountant to ensure accurate compliance with tax regulations. 📊🔍