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

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

Bharat Bond ETF

Top SIP Funds Online   The government of India has paved the way for the launch of India's first corporate bond ETF called as Bharat Bond ETF. Edelweiss Mutual Fund will be managing it. The fund is mandated to invest in AAA-rated bonds of select public sector companies (see the table 'List of constituents and their proportions in the portfolio'). The government has a threefold objective behind launching this product. One, to deepen the liquidity of the Indian debt markets and provide a gateway for easy retail participation. Two, to solve investors' dilemma of picking premium bonds. Lastly, to help the underlying government-owned companies raise funding for their operations. But does it make sense for you, the investor, to invest in it? Lets find out. What is the product? As the name suggests, it is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 ye...

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...
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