There are two stages of taxation for ESOP

I left a company, where employees were eligible for the employee stock option plan (ESOP), in May 2011. Since I am no longer an employee with the company, do I need to pay perquisite tax? Under what head can I claim refund of perquisite tax deducted by the company? What should be the purchase price of the shares and my cost price?

—Arun Agrawal

Any amount received by an individual from the employer even after cessation of his employment is taxable as “profit in lieu of salary”. Accordingly, the benefits/amount received by you from the company after termination of employment in May 2011 will be taxable under the head salary.

We have presumed that vesting of stock options has happened before you left the company in May 2011 under ESOP. We understand that you exercise the stock options granted and vested to you under ESOP and, accordingly, the shares of the company were allotted to you. Hence, there will be two stages of taxation in respect of shares allotted to employees under ESOP. The first point is when the shares are allotted by the company; the same will be taxed as salary/perquisite.

The difference between the fair market value (FMV) of the shares on the date of exercise and the grant price paid by you, if any, should be taxable as perquisite/salary on the date of allotment of shares. Though, you left the company in May 2011, the shares of the company were allotted to you under ESOP when you were an employee. Therefore, the difference between the FMV of the shares and grant price paid by you shall be taxable as perquisite/salary. Accordingly, the employer company has to compute and deduct the tax on perquisite/salary resulting from allotment of shares under ESOP. The income and the perquisite tax deducted by the company thereon would be reflected in your form 16 and you should report the same as part of salary in your personal tax return.

Further, when you sell the shares subsequently, the gains will be taxed as capital gains. The capital gains will have to be computed as the difference between the sale proceeds and FMV of the shares that was considered by the employer while computing the perquisite value including any expenditure incurred wholly in connection with the sale.

The capital gains tax implications would depend upon the period of holding of shares from the allotment date and whether security transaction tax (STT) has been paid.

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