There are two stages of taxation for shares allotted under ESOP

The first point is when the shares are allotted by the employer company. The second is when the employee sells the shares allotted to her under ESOP


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I have been allotted shares under the employee stock option plan (ESOP) by my company. The company has deducted tax at source (TDS) in the financial year (FY) 2015-16. I have not sold these shares, but plan on selling them later. What would be the tax implications on my holding these shares before I sell them and post-sale?

—Jayesh Bhandari

We understand that you have exercised stock options granted and vested to you under the ESOP of your employer, and accordingly the shares of the company were allotted to you by the employer during FY16.

There are two stages of taxation in respect of shares allotted to employees under ESOP.

The first point is when the shares are allotted by the employer company. The same is taxed as salary or perquisite in the hands of the employee. The second is when the employee sells the shares allotted to her under ESOP. At this stage, the gains are taxed as capital gains.

At the first stage, the difference between the fair market value (FMV) of the shares on the date of exercise and the exercise price paid by the employee, if any, is taxable as perquisite or salary on the date of allotment of shares. Accordingly, the employer company would have computed and deducted the tax on perquisite or salary resulting from allotment of shares to you under the ESOP. The income and the perquisite tax deducted by the company thereon would be reflected in Form 16, which is to be issued to you for FY16 by 31 May 2016.

Further, you have to report the same as part of salary in your personal tax return.

Whenever you sell these shares, the gains from the sale will be taxed as capital gains.

The capital gains are computed as difference between the sale proceeds and FMV of the shares that was considered by the employer company while computing the perquisite value including any expenditure that has been incurred wholly in connection with the sale.

The tax implications on the capital gain would depend upon various other factors such as the period of holding of shares by you from the allotment date, whether your employer company is listed, and others.

Do keep in mind that since capital gains tax is not deducted at source for the shares under the ESOP programme, you would be required to pay tax on this either as advance tax or as self-assessment tax.

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