Stock-based incentives are taxed in the hands of the employee
I am a resident Indian now, working in India. My company had allotted me shares in the UK, via Computershare, where my India bank account is being used. My company would be deducting about 35% withholding tax on the discounted shares.
How will the remaining tax be calculated and what is the tax implications for short term gain. I get 10% profit after deducting withholding tax. Then, what will be applicable tax and under which head?
—Paresh K. Bambhaniya
Stock-based incentive income is taxable in the hands of the employee. You will be taxed at two stages:
1. On allotment of shares (on exercise of stock option), the nature of income will be salary income; your employer will withhold tax and
2. On sale of shares, the nature of income will be capital gain and you will have to deposit tax as advance tax or self-assessment tax.
Upon allotment of shares, directly or indirectly, the difference between fair market value (FMV) of the shares on the date of exercise less any amount recovered, if any, will be taxable as salary income. As the shares of the UK company are not listed on a recognized stock exchange in India, the FMV of the shares on the date of exercise would have to be determined by a category 1 merchant banker registered with the Securities and Exchange Board of India. The FMV can be determined on the date of exercise, or on any date that falls within 180 days prior to the exercise date. Your employer will withhold tax on maximum marginal tax rate as per your applicable slab. The maximum marginal tax rate applicable in India is 35.535% for the FY2016-17, if the total taxable income is more than Rs1 crore.
At the time of sale of shares, you will be liable to pay India income-tax on the capital gains. The taxable value of capital gains would be the difference between the sale price less the FMV of the shares, as on the date of exercise. Capital gains on sale of shares (not listed in a recognized stock exchange in India) will be classified as short-term, if held for less than 24 months. Short-term capital gains (STCG) on sale of unlisted equity shares is taxable at applicable marginal tax rate plus surcharge and education cess.
Long term capital gain (LTCG) from unlisted shares is taxed at 20% plus the applicable surcharge and education cess, with the benefit of indexation. Thus, it is taxed at an effective rate of 23.69%, if the total taxable income is more than Rs1 crore. LTCG can be claimed exempt from tax to the extent it is re-invested in India in specified bonds or a residential house (to be either purchased within 2 years, or constructed within 3 years of transfer of the land). But there are certain restrictions on the sale of new house bought and the quantum of investment made in bonds. If this capital gain is not invested until the due date of filing of tax return in India (i.e., 31 July), you may put the amount of capital gain in a Capital Gain Account Scheme (CGAS) with a bank (not later than the due date of filing returns), and subsequently withdraw this amount for re-investment. If the entire amount is not reinvested or deposited in CGAS, the remaining portion of the gain will be taxable. Tax on LTCG or STCG can be either paid by advance tax in four instalments or before filing a return along with interest by 31 July.
In case of double taxation, foreign tax credit may be claimed in India for taxes paid in the UK against India income-tax, payable on the doubly taxed income as per the provisions of the Double Taxation Avoidance Agreement between India and the UK.
Sonu Iyer is tax partner and people advisory services leader, EY India
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