18 November 2009
company X grants option to its employee R on 1st April, 2004 to apply for 100 shares of the company at a pre-determined price of Rs.50 per share with date of vesting of the option being 1st April, 2006 and exercise period being 1st April, 2006 to 31st March, 2010. Employee R exercises his option on 31st March, 2007 and shares are allotted/transferred to him on 3rd April, 2007. On 25th October, 2007, these shares are sold for Rs.200/- each. On the date of vesting of the option, fair market value of the share was Rs.80/- per share. The tax implication of above situation will be as under:-
Since shares are allotted or transferred on or after 1st April, 2007, provisions of fringe benefit tax are attracted. Fringe benefit with respect to employee R is (Rs.80 - Rs.50) × 100 = Rs. 3,000. Company X will pay fringe benefit tax on Rs.3,000. Cost of acquisition in the hands of employee R = Rs.80 per share Capital gain = (Rs.200 - Rs.80) × 100 = Rs.12,000 Period of holding = 3rd April, 2007 to 25th October, 2007 i.e., less than 12 months. Hence, the amount of Rs.12,000 will be charged to tax as short term capital gain.
My Question, Since FBT is abolished now, Will this difference of Rs.30 is allowed as Expense? Will the employee has to pay tax on Rs.30 as Perquisite? or as Capital gain? Will the Fair Value Calculation remain same? From Which financial year it will applicable? Do we need to deduct TDS on that?
21 July 2024
Since the Fringe Benefit Tax (FBT) has been abolished in India, the tax implications related to Employee Stock Options (ESOPs) have changed. Here’s how the situation described would be treated under the current tax regime:
1. **Tax Implications for the Employee:** - The difference between the fair market value (FMV) of the shares on the date of exercise of the option and the exercise price (also known as the perquisite) is taxable as perquisite in the hands of the employee. - In this case, the FMV on the date of exercise was Rs.80 per share, and the exercise price was Rs.50 per share. Therefore, the perquisite per share is Rs.30 (Rs.80 - Rs.50). - For tax purposes, this perquisite will be added to the salary income of the employee in the financial year in which the option is exercised (i.e., in this case, the financial year ending 31st March 2007).
2. **Capital Gains Tax:** - When the employee sells the shares, the capital gains will be calculated based on the difference between the selling price and the cost of acquisition. - In this case, the selling price was Rs.200 per share, and the cost of acquisition (FMV at exercise) was Rs.80 per share. Therefore, the capital gain per share is Rs.120 (Rs.200 - Rs.80). - Since the shares were held for less than 12 months (from 3rd April 2007 to 25th October 2007), this capital gain will be treated as short-term capital gain and taxed accordingly.
3. **Fair Market Value (FMV) Calculation:** - The FMV of the shares on the date of exercise is crucial for determining the perquisite value for the employee. This FMV is determined based on a valuation method prescribed by the Income Tax Act, typically using the valuation report of a registered valuer.
4. **Applicability:** - The tax treatment described (perquisite tax and capital gains tax) applies from the financial year in which the ESOPs are exercised and the shares are acquired by the employee.
5. **TDS Deduction:** - Typically, employers are required to deduct TDS (Tax Deducted at Source) on the perquisite value when it is deemed taxable in the hands of the employee. This TDS obligation is as per the Income Tax Rules and should be complied with by the employer.
In summary: - The difference between FMV and exercise price (Rs.30 per share) will be taxed as perquisite in the hands of the employee. - The capital gains on sale of shares (Rs.120 per share) will be taxed as short-term capital gains since the shares were held for less than 12 months. - The FMV calculation remains crucial and needs to be as per the method prescribed under the Income Tax Act. - This tax treatment applies from the financial year in which the ESOPs are exercised and shares are acquired. - TDS should be deducted by the employer on the taxable perquisite amount.
It's advisable to consult with a tax advisor or chartered accountant for specific advice tailored to your situation, considering any recent updates or changes in tax laws.
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