#If your company has offered you ESOPs (Employee Stock Option Plans), it is important to understand how they are taxed. Tax can come into the picture at two stages: when you exercise the options and when you sell the shares.
#The tax treatment can vary depending on whether the shares are listed or unlisted, as well as on the applicable provisions for your investment. Here’s a simple look at how ESOP taxation works in India.
#What are ESOPs?
#An ESOP gives employees the right to buy company shares at a pre-decided price, known as the exercise price, subject to the terms of the ESOP scheme.
#For example, suppose your company gives you the option to buy shares at ₹100 per share, while their Fair Market Value (FMV) is ₹300 per share. If you exercise the option, you can acquire the shares at the predetermined price of ₹100.
#The difference between the applicable FMV and the exercise price can have tax implications.
#How are ESOPs Taxed in India?
#With ESOPs, tax can come into the picture at two stages:
#1. Tax at the Time of Exercise
#When you exercise your ESOP, the difference between the Fair Market Value (FMV) of the shares and the exercise price is generally treated as a perquisite and included in your salary income.
#For example, if:
#The taxable perquisite would generally be:
#(₹500 − ₹200) × 100 = ₹30,000
#This amount is added to your salary income and taxed in accordance with the applicable provisions.
#The method used to determine FMV depends on whether the shares are listed or unlisted, as well as the applicable valuation rules.
#2. Tax at the Time of Sale
#When you later sell the ESOP shares, any further increase or decrease in their value is considered while calculating capital gains.
#For this purpose, the FMV used to calculate the ESOP perquisite generally equals the cost of acquisition.
#Capital Gain = Sale Price − Cost of Acquisition
#For qualifying listed equity shares:
#STCG: 20% when the shares are sold within 12 months, subject to applicable conditions.
#LTCG: 12.5% on qualifying gains exceeding ₹1.25 lakh in a financial year, subject to applicable conditions.
#Applicable surcharge and 4% Health and Education Cess may also apply.
#Note: These capital gains rates apply to qualifying listed-equity transactions. The tax treatment can differ for unlisted shares or where other provisions apply.
#ESOP Tax Deferral for Eligible Start-up Employees
#Employees of eligible start-ups may be able to defer payment of tax on the ESOP perquisite, subject to the applicable conditions.
#This is a deferral of tax payment, not an exemption from tax. The deferred tax becomes payable when the prescribed conditions or triggering events occur.
#How Is ESOP Tax Calculated?
With ESOPs, the tax treatment depends on what happens when you exercise the options and when you eventually sell the shares.
#Tax at the Time of Exercise
When you exercise your ESOPs, the difference between the Fair Market Value (FMV) and the exercise price is generally treated as a taxable perquisite and added to your salary income.
#Tax at the Time of Sale
When you sell the shares, any further gain is generally taxed as capital gains. For qualifying listed equity shares, STCG is generally taxed at 20%, while LTCG is generally taxed at 12.5% on gains exceeding ₹1.25 lakh, subject to the applicable conditions.
#ESOP Tax Deferral for Eligible Start-ups
Employees of eligible start-ups may be able to defer payment of tax on the ESOP perquisite, subject to the applicable conditions. This is a tax-payment deferral, not a tax exemption.
#ESOP Taxation for NRIs
NRIs may also have tax implications in India when they exercise or sell ESOP shares. The actual treatment can depend on the type of shares, residential status and the applicable tax provisions.
If the NRI is also liable to tax in another country, the Double Taxation Avoidance Agreement (DTAA) may also need to be considered.
#Before You Exercise or Sell Your ESOPs
Before making a decision, consider:
- #Exercise price: Check how much you need to pay to acquire the shares.
- #FMV: This is important for calculating the taxable perquisite at exercise.
- #Holding period: It can affect whether the subsequent gain is short-term or long-term.
- #Tax liability: Exercise and sale can have separate tax implications.
- #Liquidity: Unlisted ESOP shares may not be readily sold.
#Conclusion
ESOPs can give employees a chance to benefit from the growth of the company they work for. But before exercising or selling them, it is important to understand the tax involved.
In simple terms, tax can arise when you exercise the options and again when you sell the shares, depending on the applicable rules. Consider the exercise price, FMV, holding period and your overall tax position before making a decision.
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