Taxation of Shares Received in Employees Stock Options-Salary Tax and Capital Gain Tax
Shares alloted in an scheme of ESOP:
The shares allotted to employees are taxable in hands of Employees. The ESOP is considered as prequisite to salary(17(2)(vi)).
The value of prequisite will be:
Fair Market of Shares determined as per rule 3 (amended) of Income Tax Rules 2003.
Share Sold after allotment (Section 49 of Income Tax Act 1961):
Shares allotted in ESOP, if are sold than Capital Gain tax is attracted and tax is payable under the head Income from Capital Gains.
The Capital Gain will be computed as follow:
Sale Consideration = XXX
Less: Purchase Consideration* = XXX
Capital Gain = XXX
* Purchase consideration is the fair Market value computed when ESOP were allotted and were taxed under the head Income From Salary.
What happens if ESOP were not taxed as prequisites? ESOP are considered as prequisites from Assessment year 2010-11 only, i think.
If ESOP were not taxed as prequisites than Purchase consideration will be computed accordingly.
If shares were allotted before April 2007, than the amount actually paid to aquire shares shall be the purchase consideration.
If the Shares were allotted After 1 April 2007 but before April1 2009, than the purchase consideration should be Fair market value of shares minus price paid to employer.
Incase shares were allotted after March31, 2009 than Purchase consideration should be Fair Market value of Shares as on date of excercise of Options.
Is provisions relating to Long term gain and Short term gains applicable to ESOPs?
Yes if shares were hold for more than 12 months, the resulting gains are Long term capital gains otherwise Short term capital gains.
As far as i know the rules, shares sold after one year are exempted from tax. Are the shares aquired through ESOPS are compulsory taxable?
Shares sold through Recognised Stock exchange are exempted from tax ( If the gain is long term).
If ESOP shares are sold via stock exchange than tax is exempted in case these are long term gains.
However short term capital gain is not exempted even in case of shares sold through stock exchange.