Taxation of worker inventory choice plans

Employee inventory choice plans (ESOPs) have gained recognition amongst start-ups. Under ESOP, an organization grants sure workers the correct to buy its inventory at a pre-determined value (train value). This plan is unfold over a time frame (vesting interval). However, ESOP brings together with it the problem of taxes.

Here’s an instance: Say, on 1 April 2021, Minali joined Company XYZ and had the choice to buy 500 shares at an train value of ₹510 per share. The vesting interval is 20% on the finish of every 12 months of service within the firm. On the mentioned date, the market worth of the corporate’s shares is ₹1,000 per share and Minali decides to purchase 100 shares and pays an quantity of ₹51,000 [510×100 shares]. The distinction between the train value and the market worth ( ₹490 per share x 100 shares) aggregating to ₹49,000 might be handled as a perquisite in Minali’s fingers. The employer will deduct TDS on the identical.  Every 12 months, as the choice vests and Minali workout routines the choice to buy these shares, related taxation would apply. Suppose Minali sells 100 shares on 1 May 2024 for ₹1,500 per share, long run capital positive aspects (LTCG) of ₹50,000 [( ₹1,500 – ₹1,000) x 100 shares] might be relevant. 

The Finance Bill 2020 launched some leisure on taxation of perquisite on ESOPs issued by start-ups. These relaxations can be found if the start-up: 

1. Was integrated between 1 April 2016 and 31 March 2023 [as amended by finance bill 2022]

2. Has whole turnover of lower than ₹100 crores for the 12 months through which profit is sought.

3. Is licensed as an eligible start-up by the inter-ministerial Board of the Government of India.

Let’s assume that firm ABC is an eligible start-up fulfilling all circumstances acknowledged above. Manav joined the corporate on 1 April 2021 and had the choice to buy 5,000 shares at an train value of ₹1 per share. The vesting interval is 20% on the finish of every 12 months of service. Suppose the truthful market worth of the corporate’s shares is ₹100 per share. Manav workout routines the choice to buy these shares and pays an quantity of ₹1,000 [ ₹1 x1000 shares]. The distinction between the train value and the truthful market worth, that’s, ₹99 per share x 1,000 shares aggregating to ₹99,000 might be handled as a perquisite within the fingers of Manav. However, the tax on such perquisite is not going to be instantly payable and therefore the employer is not going to should deduct TDS on the identical. 

The tax on this perquisite might be payable inside 14 days from the incidence of any of the next occasions:

a) Expiry of 48 months from the top of the related evaluation 12 months (AY); or

b) From the date of sale of such ESOP shares by the assessee; or

c) From the date of the taxpayer ceasing to be the worker of the ESOP allotting employer

The charges of tax in such instances shall be the one relevant for the 12 months through which ESOP was allotted.

Scenario (a): Manav continues as an worker of firm ABC and holds the shares. The shares have been bought in FY 2022-23 (AY 2023-24) and therefore tax might be due on the expiry of 48 months from AY 2023-24 i.e. 31 March 2028. The tax might be payable by him inside 14 days i.e. 14 April 2028. 

Scenario (b): Manav continues as an worker of firm ABC however sells the shares on 30 June 2023. Tax on perquisite might be payable by him inside 14 days. There isn’t any change within the taxation of LTCG on sale of shares obtained beneath ESOP.

Scenario (c) : Manav ceases to be an worker of firm ABC on 31 May 2023. Then the tax might be payable by Manav inside 14 days.

In all three eventualities, the tax charge relevant on the perquisite quantity of ₹99,000 would be the relevant tax charge for AY 2023-24.

ESOPs, as a part of a remuneration bundle, additionally deliver together with them tax legal responsibility. Employees want to contemplate the online profit publish the tax outgo if ESOPs are included of their wage bundle.

Nitesh Buddhadev is founding father of Nimit Consultancy.

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