ESOPs Taxation in the hands of an Employee

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Hiral Vakil

Capital Gains
ESOP
Form 16
Salary Income

ESOP (Employee Stock Option Plan) is an Employee Benefit Plan offered by an employer/company. ESOP allows an employee to buy a stock of their company at a below-market price. It also offers ownership interest to employees. An employee needs to understand ESOP taxation before exercising the option. ESOPs are taxed twice in the hands of an employee:

Hence it is important to understand the tax implications of ESOPs before filing ITR of that financial year.

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ESOP Taxation on Purchase of Shares

When an employee buys the shares of a company, it is treated as Perquisite. The shares are credited to a Demat Account of an employee once shares are purchased. Following are the tax implications when you buy the shares:

Example: Neha works in a startup in India. During FY 2019-20 her company announces ESOPs for all the current employees. Neha decides to exercise her option to buy the shares of the company. Under this scheme, Neha received 2000 shares at INR. 20 per share. The FMV of the shares is INR. 65 per share. Following are the tax implication on the above transaction:

Purchase Price: INR. 20

FMV: INR. 65

Perquisite: INR 45 (65-20)

Taxable Perquisite Amount: INR. 90,000 (2000X65)

Now the company will treat INR. 90,000 as a taxable salary of Neha and will deduct TDS on the same. While filing her ITR Neha needs to show INR. 90,000 as Perquisites under Salary Income Head.

In Budget 2020 FM announced to defer TDS or tax payment on shares allotted by the startups to their employees under ESOPs. This means an employee of startup who are exercising their ESOPs may have to pay tax at a later date. Employees will be paying tax at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier.
Tip
In Budget 2020 FM announced to defer TDS or tax payment on shares allotted by the startups to their employees under ESOPs. This means an employee of startup who are exercising their ESOPs may have to pay tax at a later date. Employees will be paying tax at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier.

ESOP Taxation on Sale of Shares

When an employee sells the shares, it is treated as Capital Gains. Following factors are considered for calculating Capital Gain Income:

  1. The Period of Holding: In case of ESOPs period of holding is from the exercise date up to the date of sale. Long Term/Short Term Capital Gain is determined by taking into account the period of holding.
  2. Taxable Amount: The difference between Sale Price and FMV on the exercise date is taxed as Capital Gains.

The tax treatment is different depending on whether the company is listed on the stock exchange or not.

Tax Treatment on sale of Listed Shares

Tax Treatment on Sale of Unlisted Shares

Example: Arya is a salaried individual. She works for a startup(listed Company) She received 2000 shares from her company under the ESOPs scheme in FY 2018-19. And she sales the shares on 20/01/2020. Following are the information to keep in mind:

Date of Purchasing Shares/Exercising the ESOPs: 25/02/2019

FMV as on 25/02/2019: INR. 50

Sales Price as on 20/01/2020: INR. 75

In the above case, the following will be the taxability:

Period Of Holding: 25/02/2019 to 20/01/2020 i.e, less than 12 months (Listed Company). Hence there will be Short Term Capital Gains.

Taxable Amount: INR. 50,000 [2000X25(75-50)]

Tax Rate: 15%. Since this is STCG from shares of Listed Company it is taxable at a special rate of 15%.

Tax Amount: INR. 7,500 (50000 X15/100)

FAQs

Under which head of Income-tax is ESOP taxable and which ITR is to be filed?

-When an employee buys the shares of a company, it is treated as Perquisite. And thus taxable under the head Salary. In this case, the taxpayer is required to file ITR-1.
-When an employee sells the shares, it is treated as Capital Gains and thus taxable under Capital Gain head. In this case, the taxpayer is required to file ITR-2.

How do I report employee stock options on tax return?

Since you’ll have to exercise your option through your employer, your employer will usually report the amount of your income as ordinary wages or salary and the income will be included when you file your tax return on Income Tax Portal.

What happens when you leave an ESOP?

If you quit or are laid off, the ESOP distributions are deferred for six years . Once those six years pass, you may receive the value of your ESOP shares in either one lump sum, or in basically equal payments made over five years. 

  • TD says:

    Company is deducting TDS @ 30% slab rate on ESOP. However, I fall under 20% slab rate. can I claim return while filling my ITR-1 Return for this extra TDS deducted?

    • Maharshi Shah says:

      Yes, you can claim all the TDS Deducted by your employer while filing ITR. If the deducted TDS is more than your total tax liability then refund of the same will be issued once filed ITR is processed by the IT Department.

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