Earlier,
From assessment year 2001-2002—
As per the provisions to S. 17(2)(iii) of the Act, the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly/indirectly under any employees’ stock option plan (ESOP) or scheme (ESOS) of the company offered to such employees in accordance with the guideline issued in this behalf by the central government (notification no. SO 1021(E) [F No. 142/48/2001-TPL] dated October 11, 2001) is not considered a perquisite.
As per the provision to S. 47(iii) of the Act, any transfer of a capital asset being shares, debentures or warrants allotted by a company directly/indirectly to its employees under any ESOP/ESOS of the company offered to such employees in accordance with the aforesaid guidelines shall be regarded as a transfer and hence, liable to income-tax. U/s 49(2AA) of the Act, the cost of acquisition of such securities shall be the FMV or the cost of acquisition. Hence, tax arises only once at the time of sale of the securities.
However, if the conditions of the above guidelines are not complied with, then the perquisite value, being the amount representing the difference between the exercise price and fair market value (FMV) of the option on the date of excise or discount offered, will be considered a perquisite u/s 17(2)(iii) of the Act from assessment year 2001-2002 onwards. The company would be liable to deduct income-tax at source on such perquisite u/s 192 of the Act. When the securities received are sold, “capital gains” would arise. Hence, tax arises twice at the time of receipt of the perquisite and at the time of sale of the securities, both in the hands of the employee.
Changes in ESOP taxation
For a salaried employee, the income from “salary” includes perquisites. U/s 17(2)(iii) of the Income-Tax Act, 1961 (the Act) “perquisite” includes the value of any benefit/amenity granted/ provided free of cost or at concessional rate.
Changes proposed by Budget
The Union Budget 2007-2008 proposes to change the taxation of ESOP/ESOS and sweat equity shares with effect from assessment year 2008-2009 by levying fringe benefit tax (FBT) on the employer in respect of securities as defined in S. 2(h) of the Securities Contracts (Regulation) Act, 1956, including ESOP, and sweat equity shares, which may be allotted to the employee or director for consideration other than cash.
| Tax Liability |
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| Tax incidence |
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| Capital Gain Tax | The employee shall be subject to the payment of Capital gain tax at the time of sale of shares issued under this scheme at the rate as applicable on that date. |
Further, as per S. 49, Ascertainment of Cost in specified circumstances for capital gain—
A person becomes the owner of a capital asset not only by purchase but also by several other methods.
S. 49 gives guidelines as to how to compute the cost under different circumstances.
49(2AA). With effect from A.Y. 2010-11, where the capital gain arises from the transfer of specified security or sweat equity shares referred to in S. 17(2)(vi), the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purpose of S. 17(2)(vi) for perquisite valuation.
Where, the cost of acquisition means the price which an assessee has paid to purchase, construct or acquire an asset. No problem arises in finding out the cost of acquisition in case of assessee purchasing, constructing or acquiring the asset himself. But in other cases there are different rules to determine the cost of acquisition.
Thus, in S. 49 of the Income-tax Act, for sub-s. (2AA), the following sub-section shall be substituted with effect from the 1st day of April, 2010, namely:—
Clause 23 of the Bill seeks to amend S. 49 of the Income-tax Act, which relates to cost with reference to certain modes of acquisition.
The existing provisions contained in sub-s. (2AA) of the said section provide that where the capital gain arises from the transfer of a share, debenture or warrant, which has been taken into account while computing the value of perquisite under clause (2) of S. 17, the cost of acquisition of such share, debenture or warrant shall be the value taken into account for computation of such perquisite under that sub-section.
It is proposed to substitute the said sub-s. so as to provide that where the capital gain arises from the transfer of specified security or sweat equity shares referred to in sub-clause (vi) of clause (2) of S. 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause.
This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-2011 and subsequent years.
In brief,
Capital gain on Sweat Equity/ESOP |
Relevant S. 49(2AA) |
| Date of grant of ESOP in favor of assessee is material for holding period or date on which option is exercised. Former view is more practical—2010 -33 DTR -287 (Hyd.) Other view is supported by 2009 -120 ITD -444 (Bangalore) |
| Capital gain is difference between sale consideration and amount paid to company on allotment. |
| Indexation and exemption U/s 54 available |
Reference:
As Per Section 49(2AA), of the Income Tax Act, 1961-
Cost with reference to certain modes of acquisition.
49(2AA). Where the capital gain arises from the transfer of specified security or sweat equity shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause.