If your CTC has an exciting but rather confusing component, it would definitely be ESOPs. Employee Stock Option plan allows you to become a shareholder of the company at a discounted price. But, this discount and shareholding impact your income tax return.
Let’s find out how ESOPs will hit your income tax return.
Basics First!
To understand the tax implications, it is important to understand the three terms viz. Grant date, Vesting period and Exercise of options.
Grant Date is when the company issues you grant letters for Employee stock options. This letter mentions the vesting period, exercise period of options and the conditions which could render you ineligible for the ESOPs granted.
The Vesting Period is the period after the grant date when the employees have to fulfil those conditions to be eligible for exercising these options. Once the vesting period ends, the exercise period begins when the employee can buy shares.
Event of Taxation
Till, the grant date and vesting period, there is no tax implication. It arises during the vesting period in two cases:
- If you choose to purchase the shares at the price offered by the company
- When you sell these shares after allotment
On Exercise of Options
The shares allotted will be taxable under the salary head. Since you are getting shares at a discounted price, the discount that you got on the fair market value of shares will be treated as a perquisite. If the shares are listed, then the Fair market value will be calculated as the average of the opening and closing price of the share on the stock exchange. If shares are unlisted, this value will be determined by a merchant banker.
On Sale of Options
Next tax implication arises when you sell these shares. Any profit that you earn on such selling would be taxable under the head Capital Gain. Since, you have paid tax on discount at the time of exercise of options, your purchase cost of these shares will be Fair Market Value. The difference between the selling price and this fair market value will be Capital Gain.
There can be two types of Capital Gain depending on the period of holding i.e. Long Term Capital Gain and Short Term Capital Gain. The tax rate depends on the type of Capital Gain and also on whether the share is listed or unlisted.
If the shares are listed on the stock exchange and the period from the date of purchase till the date of sale is up to 12 months, it will be classified as Short-term Capital Asset. These are taxable at 15%. If the holding period is more than 12 months, any capital gain would be taxable at 10% in excess of Rs. 1 lakh.
If the shares are unlisted the criteria for 12 months gets replaced by 24 months. If you sell the shares within 24 months, any short-term capital gain would be taxable as per your income tax slab. If the holding period is more than 24 months, it will be taxable at 20%.
To Conclude
Employees need to comply with the disclosure requirements as well. In the case of unlisted shares, the employee needs to report the details of such shares in their income tax return. So, don’t forget to represent ESOPs in your income tax return properly.
Leave a Reply