EMPLOYEES STOCK OPTION PLAN (ESOP)

Employee Stock Option Plan are equity based transactions between the owner and its employees, wherein employees are offered stake in the company after the vesting period expires in the form of shares / options at some reduced price. The ESOPs are taxable as perquisites in the hands of employees. Perquisite shall be taxable in the hands of the employee only when shares are ALLOTTED TO HIM under ESOPs. The perquisite is not taxable when employee exercises his option to ESOPs.

Stages in Employees Stock Option Plan

There are three stages in Employees Stock Option Plan (ESOP) i.e.

STAGE I: OFFERING OF SHARES UNDER ESOPs

STAGE II: EXERCISE OF OPTION TO GET ESOPs

STAGE III: ALLOTMENT OF SHARES UNDER ESOP

TAXATION OF ESOPs

There have been various changes in the taxation of ESOP’s in the past 20 years. The Government finally seems to have found a logical way of taxing ESOP’s. The manner of computation of Tax of ESOP’s in the hands of the employee has been explained hereunder:-

1.       At the time of giving ESOP’s: The benefits arising on ESOP’s are taxed as Perquisites in the hands of the employee and form a part of the employee’s salary income. The employer is also required to deduct TDS in respect of such perquisite. The perquisite value is computed as the difference between the fair market value of the share and the Exercise price.

VALUATION OF PERQUISTES

Perquisites in respect of Equity Shares allottes or transferred under Employees Stock option Plan shall be worked out on the basis of Fair Market Value of ESOPs on the date when employee exercises his option to ESOPs.

Taxable perquisite in the hands of employees on the date of allotment of shares shall be determined as under:

	Fair Market Value (FMV) of the shares on the date on which the option is exercised by the employee	X
Less:	Amount paid by the employee in respect of the shares	Y
	Taxable Perks	(X-Y)

 

CALCULATION OF FAIR MARKET VALUE (FMV)

The fair market value (FMV) of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee shall be determined as under:

·         Where shares in the company are listed on a single recognized stock exchange: FMV shall be the average of opening and closing price of shares on the date of exercise of option. However, if on the date of exercise of option there is no trading in shares, the FMV shall be the closing price of the share on any recognised stock exchange on a date closest to the date of exercise of option and immediately preceding such date of exercise of option.

·        Where shares in the company are listed on more than one recognized stock exchange:  FMV shall be the Average of opening and closing price of the share on the date of exercise of option on a recognised stock exchange which records the highest volume of trading in the shares. However, if on the date of exercise of option there is no trading in shares, the FMV shall be the closing price of the share on a recognised stock exchange which records the highest volume of trading on a date closest to the date of exercise of option and immediately preceding such date of exercise of option.

·         Where shares in the company are not listed on a recognized stock exchange:  FMV shall be such value of the share in the company as determined by a Category I merchant banker registered with SEBI on the specified date.

Where specified date means

Ø  The date of exercise of option or

Ø  Any date earlier than the date of exercise of option, not being a date which is more than 180 days earlier than the date of exercise of option.

2.       At the time of sale of such ESOP’s by the employee: The gains arising on the sale of ESOP’s are considered to be Capital Gains; Capital Gains Tax is levied on such gains and tax is liable to be paid in the year in which such ESOP’s are sold. The Capital Gain is computed as the difference between the sale price and the price at which it was awarded by the Employer. The Capital Gains treatment further depends on the holding period of the ESOP’s i.e. if the shares are held for less than 12 months – Short Term Capital Gains Tax@ 15% is levied and if the shares are held for more than 12 months- Long Term Capital Gains Tax is levied (this is currently NIL). Thus, if such ESOP’s are held by the employee for more than 12 months, the gains arising on the sale of such ESOP’s is effectively exempt from Tax.

This Article has been Shared by Student of ICAI Palak Aggarwal. She can be reached at aggarwal.palak2809@gmail.com

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