Income Tax on employee stock ownership plan (ESOP)in India

I am working in an MNC and am investing into Employee Stock Purchase Program (ESPP). During the purchase of the share there is a 15% discount given on the least value of the 1dt and last date of the ESPP offering period. My finance department has confirmed that the tax is deducted as per my slab ie 30% (shares equivalent to my gain due to 15% employee discount and increase in the value per share from the starting date to the date of vesting) . E.g. out of 100 shares purchased, about 20 shares were sold off to recover for 30% tax on the effective gain.

My question is whether I need to pay any tax on the gain again during ITR filing on the gain. If yes, how much? If no, what all documents I need to keep ready to convince the authority that the no tax is due on this?

Hi Ravi,

In case of ESPP tax liability arrises on 2 occasions:

  1. at the time of opting in for ESPP: It is considered as a Perquisite under Salary Income Head

  2. at the time of selling of shares: It is considered as Capital Gain.

You can read more about it tax implications on ESOPs here :slight_smile:

My company’s investor recently aqquired ESOP from employees. Excercise and sell happened on the same day. Company deducted 30% TDS on the entire gain amount. Form16 also shows the full gain amount as Prerequisite tax under Salary Head.

While filing ITR-2, can I reduce prerequisite tax based on (FMV - excercise price) formula and remain (Sell price - FMV) as capital gain?

Also, I have some carry forwarded short term loss from listed shares. Can I adjust this STCG (of Esop) with the loss? Please help :slight_smile:

Hi @Shubhabrata_Naha

Yes, You can mention Sell price - FMV as capital gain while filing ITR-2.
Moreover, You can also adjust this STCG (of ESOP) with the brought forward short term losses.

If someone has worked in India for 5 yrs and received esops and receives dividends. He also has an EPF.
Now, he has left his job in India and has migrated to Canada permanently. My question is I read that canada taxes the global income of the resident. So, as he worked more than 5 yrs in india and wants to withdraw the EPF, it should be tax free in India. But would it be taxable in Canada? Also, are the dividends received from esops still held taxable in India or Canada. Since dividend is less than 2.5lakh per year, It should be tax free in India. But what about in Canada? Also, how would capital gains be taxed if he sells his esops?

Hey @ranjit, dividend would be taxable in India at slab rate. When ESOPS are sold, it would be taxed under capital gains income considering short term or long term gain. EPF will be taxed on withdrawal, given the withdrawal is done prematurely. You can read more about EPF taxability from here:

Hi

My wife used to work for a US based start up based out of Bengaluru. She sold her ESOP shares in Janaury last year (FY21-22).I was inward remittance in USD which got credited in INR equivalent after bank reached out to us informing about the remittance (Think there is some protocal to be followed by Banks and we too filled some form). My question is: Since this is an income/gain, how do we treat it from Tax perspective? No TDS was deducted by the start up company.Should we pay advance tax now for this or a separate procedure for this

@Sakshi_Shah1 can you help ?

1 Like

Hey @anuragsoni88

ESOP is a capital asset and income on sale of ESOP is treated as income from capital gains. Here is the tax treatement on sale of ESOPs:

  • Period of Holding is calculated from exercise date to sale date.
  • LTCG - If the period of holding is more than 24 months, it is a Long Term Capital Gain and taxed at 20% with the benefit of indexation.
  • STCG - If the period of holding is less than 24 months, it is a Short Term Capital Gain and taxed at slab rates.

You can read more about it here - ESOPs Taxation in the hands of an Employee

Since this is a taxable income, you must calculate the tax liability and pay Advance Tax to avoid interest and penalty.

Use this to calculate and pay advance tax - Advance Tax Calculator

Thank you for your response. Really appreciate it. Our scenario though is a little different from tha article you share. Also I should not have used ESOP in my query earlier.

  1. The US based company is NOT listed.
  2. Shares of the company that my wife got were performance linked,accumualted over the years.She did not have any option but to accept it. So I am not sure if technically it will be considered as Exercising option ? Please help. What she did was just sell it back to the employer the shares that got vested and got the equivalent amount in INR around 2 Lakh 80 thousand

Moreover, advance tax period is now over for FY21-22 ? So do you suggest paying taxes as per tax slab due to this income now to avoid Tax or penalty ?

Hey @anuragsoni88

The tax treatment would be similar to that of unlisted shares i.e. any share that is not listed on a recognised stock exchange in India. Further, the shares that got vested is considered a capital asset, and income on their transfer is treated as a Capital Gain. Here is the tax treatment:

  • Period of Holding - 24 months to be counted from vesting date to date of sale
  • LTCG - If the period of holding is more than 24 months, it is a Long Term Capital Gain and taxed at 20% with the benefit of indexation.
  • STCG - If the period of holding is less than 24 months, it is a Short Term Capital Gain and taxed at slab rates

The due date to pay last installment of Advance Tax was 31st March 2022. However, you can still pay it as a Self Assessment Tax to save additional interest for the remaining months till the time your file your ITR.

Thanks a lot for your response…We are not sure about vesting date…Can you suggest what documents can my wife ask her employer so that we can accurately determine vesting date and period of holding ? Also is there any retrospective tax for previous AY that we need to file as well!

Thanks Anurag

Hey @anuragsoni88

The legal document of the ESOP would comprise of all the details. The document would differ from company to company. Vesting date is the day on which the employee is entitled to buy the shares.

There is no retrospective tax on such income. You must report the income correctly in the Income Tax Return for the relevant financial year.

Do we have to check the valuation of the Company before coming out with an ESOP plan?

Hey @Shweta_Saini

Yes, the valuation of the company will be done before coming out with an ESOP. However, it depends on the type of company:

1. In the case of listed companies: At the time of grant of an option valuation of fair Market value of shares shall be done by a registered valuer. And at the time of exercise of an option, the valuation shall be done by Merchant banker.

2. In the case of Unlisted companies: At the time of grant and exercise of an option valuation of Fair value of shares shall be done by a registered valuer as per “Guidance note on accounting for employee share-based payment”.