ESOP TAXATION

I have exercised employee share option plan of 200 shares of my
company. The grant price was Rs 630 a share. Fair market value (FMV)
date was June 21, 2011, at Rs 2,314. Exercise price per share was Rs
1,151.

Suppose, if I sell 100 shares at Rs 2,500 a share, what will be my tax
liability? I will have to pay short-term capital gains at 15 per cent,
right? But on what amount? Is it on Rs 1,34,897 (Rs 2,50,000 less Rs
1,15,103) or on Rs 18,517 (2,50,000-2,31,483)? Apart from short-term
capital gains, do I have to include the amount in my income for shares
getting shares less than the market price? Then how much should I
include? As my employer has already deducted and paid perquisite tax,
do I have to show it again in my returns? — K.S. Nagesh

Under the Income-Tax Act, there are two stages of taxation in share
allotment under the employee equity incentive plans. When the shares
are allotted by the employer to employee, it is taxed as perquisite.
When the shares are sold by the employee, it is taxed as capital
gains.

In your case, the employer should have computed the difference between
the FMV of the shares on the date of exercise and the exercise price
paid by you and taxed the same as perquisite on the date of allotment
of shares. The income and the taxes paid will reflect in the Form 16
and you should report it as part of salary in your personal tax
return.

When you sell the shares, you would compute the capital gains as
difference between the sale proceeds and FMV of the shares considered
by the employer while computing the perquisite value including any
expenditure incurred wholly in connection with the sale.

Taxation of capital gains from sale of equity shares depends on the
period of holding from date of allotment to date of sale. If the said
shares are sold after holding for more than 12 months from the date of
allotment, the capital gains are termed as long-term capital gain
(LTCG).

If Securities Transaction Tax is paid on such LTCGs, you can get full
exemption. In case STT is not paid, LTCG would be taxable at 20 per
cent (with benefit of indexation) or 10 per cent (without benefit of
indexation).

Where the holding is not more than 12 months, the capital gains are
short-term capital gains (STCG) and where STT is paid at the time of
sale, tax will be applicable at 15 per cent. If STT is not paid,
applicable maximum marginal tax rate would apply. Additional education
cess would apply on these rates.

Assuming FMV of Rs 2,314 has been considered by the employer for
perquisite taxation, capital gains should be Rs 18,600 (i.e. Rs
250,000 less 231,400).


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CA Ramachandran Mahadevan,M.Com.,F.C.A.,
I-708,Mantri Tranquil,Subramanyapura Post,
Bangalore-560061
Karnataka,India.
+91 80 42011024