Skip to main content

Tax Treatment of ESOPs

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 


Don't sell the shares immediately after you get possession. It might translate into tax liability, if not held for one year or more

 

Ajay Kumar was handsomely rewarded with Employee Stock Option Plans ( Esops) on the foreign company shares ( listed on European stock exchanges) from his multinational company last year. He was more than happy when he received his paycheck in August last year after he had exercised his stock options and then sold shares to capitalise on the 10 euro per share (approximately ₹ 87) difference ( between the market price and the exercise price) that was available on the Esops. His company withheld the required TDS on the Esops realisation and handed the balance to him. Esops have emerged as one of the most effective compensation tools by Indian and multinational companies alike. A KPMG study on Esops lists some of the popular reasons for implementing them as: wealth creation for employees, retention, attracting fresh talent and inculcating the feeling of ownership in order to motivate employees. The same study noted that Indian companies with overseas operations are increasingly awarding equity incentives in order to attract and retain talent.

How it works?

Under an Esop, top- performing employees are eligible to purchase apre- determined number of shares (option granted) in the company at apre- determined price ( also called the exercise price). This is usually at adiscount to the market price. Once this option vests with the employees, their decision to buy ( or not) such shares has to be conveyed during the vesting period ( generally a year or two). After the vesting period, the shares can be bought at the exercise price. At that time, an employee may sell the stock or hold on to it in hopes of further price appreciation. In some cases, companies provide for a specified lockin period, during which the shares cannot be sold.

Tax implications

The taxation laws of Esops has gone through several changes in the past few years. During the draconian FBT regime, an employer was required to pay a fringe- benefit tax on the benefit derived by employees from Esops, which in turn could be recovered from employees.

At present, benefits derived from Esops are taxed as perquisites and form part of salary income. The perquisite value is computed as the difference between the Fair Market Value ( FMV) of the share on the date of exercise and the exercise price. There are specific valuation rules prescribed for listed and unlisted companies in order to determine the FMV. An employer is required to deduct tax ( TDS) in respect of any tax liability arising from perquisites.

Personal taxes

In addition, the difference between the sale consideration of the shares and the FMV on the date of exercise (as referred above) is chargeable to tax under the head capital gains in the hands of an employee. In order to compute capital gains, the FMV on the date of exercise becomes the cost of acquiring such shares. Depending on whether they have been held for 12 months or more from the date of exercise, capital gains will qualify as long term or short term. Further, if the shares are sold on a recognised stock exchange in India, the longterm capital gains will be exempt and the short- term capital gains will be subject to the preferential rate of taxes at 15 per cent.

Most employees allotted Esops sell the shares immediately to enjoy the gains and regard this money as apart of a bonus. Consequently, this money is spent on luxury holidays, cars or more productive matters such as pre- paying large home loan balances.

After having utilised the money gained from Esops, employees forget the potential tax liability arising out of the capital gains. They are then in for a rude shock when they come face- to- face with the truth during tax- filing season.

The tax soup!

In Kumar's case above, since the Esops were sold immediately on exercise, he had earned short- term capital gains. Again, as the shares were sold on a foreign stock exchange, they were not eligible for preferential tax rates. In other words, Kumar was now liable to pay short- term capital gains tax on the entire capital gains of ₹ 3 lakh at the slab rates applicable, which turned out to be the highest slab rate, before he could file his tax returns in July this year. To add to his woes, the high amount of taxes (approximately ₹ 90,000) that he was now liable for, also attracted interest under various sections of the Income- Tax Act for non- payment of advance- tax installments during the previous year 2012- 13. His total tax liability, including tax and interest amounted to a whopping ₹ 105,000 that was due to be paid by the end of July 2013. Kumar was dumb- struck with these calculations and left feeling that the whole Esop thing did not really benefit him in the way he had perceived it.

Much like him, other employees cash in on Esops by selling them in the stock market. They seem to be content with the TDS by an employer and forget the capitalgains liability. Even with the preferential short- term capital- gains tax rate, the liability works out to quite asum if left till the year- end.

All employees who cashed in on Esops since April this year can work out their potential capital- gains liability and discharge a part of it through the first advance- tax installment due by September, 15. Of course, holding on to the shares for more than 12 months after the date of exercise and then selling it on recognised Indian stock exchanges can help an employee avoid capital gains totally.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...
Read more

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...
Read more

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...
Read more

Mutual Fund Review: Reliance Regular Savings Equity

    Despite high churn, Reliance Regular Savings Equity has managed to fetch good returns   In its short history, this one has made its mark. Though its annual and trailing returns are amazing, the fund started off on a lousy note (last two quarters of 2005). It managed to impress in 2006 and was turning out to be pretty average in 2007, till Omprakash Kuckian took over in November 2007 and wasted no time in changing the complexion of the portfolio. Exposure to Construction shot up to 28 per cent with almost 21 per cent cornered by Pratibha Industries and Madhucon Projects . Exposure to Engineering was yanked up (18.50%) while Financial Services lost its prime slot (dropped to 6.69%) and Auto was dumped. That quarter (December 2007), he delivered 54.66 per cent (category average: 25.70%).   When the market collapsed in 2008, thankfully the fund did not plummet abysmally. But even its high cash allocations could not cushion the fall which hovered around the category average. ...
Read more

Stock Review: Havells

HAVELLS India's stock performance has been muted in the past three months, in line with the weak broader market. But, given the turnaround in its overseas subsidiary and the launch of new products in its consumer durable business, the company's stock may undergo a re-rating.    Havells is India's leading consumer electrical goods company, with consolidated sales of . 5,527 crore in the past four quarters. Its wholly-owned subsidiary Sylvania, which makes lighting and fixtures, has established brands in European, Latin American and Asian markets. Sylvania repre sented nearly half of the company's consolidated revenues in the first half of FY11.    Sylvania's poor financials hit Havells' consolidated performance in FY10. But, this has changed in the cur rent fiscal. Havells has reduced fixed costs of Sylvania by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations such as India and China. In the September 2010 quarter, Sylv...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now