Quick Summary
Employee Stock Option Plans, or ESOPs, have become an important part of employee compensation, particularly in start-ups. Instead of receiving the entire compensation in cash, employees may be given an opportunity to acquire company securities either free of cost or at a concessional price. While ESOPs can give employees an opportunity to participate in the growth of a company, they also have important income-tax implications. The Income Tax Department has explained the taxation of ESOPs under
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FAQ :
An ESOP becomes taxable when the employee exercises the option to acquire the securities. The benefit is treated as a perquisite, calculated as the difference between the Fair Market Value (FMV) on the exercise date and the amount paid by the employee.
For listed shares, the FMV is generally based on stock exchange prices. For unlisted shares, a merchant banker determines the value on or before the exercise date, subject to specific rules.
When ESOP shares are sold, any profit is subject to Capital Gains tax. The holding period for these shares begins from the date of allotment, not the exercise date, and the FMV on the exercise date is considered the cost of acquisition.
Yes, employees of eligible start-ups can benefit from a deferment of tax and TDS on ESOP perquisites. This means the tax payment is postponed until specific trigger events, such as ceasing employment or selling the shares, occur.
No, tax deferment for eligible start-up ESOPs does not mean the tax is waived. It only postpones the point at which the tax on the ESOP perquisite needs to be paid or deducted.
Employees should track the date of exercise, date of allotment, the FMV on the exercise date, the amount paid for the securities, the date of any subsequent sale, the applicable holding period, and whether their employer qualifies as an eligible start-up.
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