Last Friday we shared a sample plan on ESOPs in the L & D Group. Hope that was simple and easy to understand.
Let us look at some taxability provisions related to ESOPs, starting with India:
Taxation of ESOP’s in India
There have been various changes in the taxation of ESOP’s in the past 20 years. The Government finally seems to have found a logical way of taxing ESOP’s. The manner of computation of Tax of ESOP’s in the hands of the employee has been explained hereunder:-
At the time of giving ESOP’s: The benefits arising on ESOP’s are taxed as Perquisites in the hands of the employee and form a part of the employee’s salary income. The employer is also required to deduct TDS in respect of such perquisite. The perquisite value is computed as the difference between the fair market value of the share and the Exercise price.
At the time of sale of such ESOP’s by the employee: The gains arising on the sale of ESOP’s are considered to be Capital Gains; Capital Gains Tax is levied on the such gains and tax is liable to be paid in the year in which such ESOP’s are sold. The Capital Gain is computed as the difference between the sale price and the price at which it was awarded by the Employer.
The Capital Gains treatment further depends on the holding period of the ESOP’s i.e. if the shares are held for less than 12 months – Short Term Capital Gains Tax@ 15% is levied and if the shares are held for more than 12 months- Long Term Capital Gains Tax is levied (this is currently NIL). Thus, if such ESOP’s are held by the employee for more than 12 months, the gains arising on the sale of such ESOP’s is effectively exempt from Tax.