Taxability of Employee Stock Option Plan (ESOP)

Taxability of Employee Stock Option Plan(ESOP) : Employee Stock Option Plan (ESOP) is an option given to directors, officers or permanent employees of a company or of its subsidiary, in India or outside India, or of a holding company or associate company of the company to purchase or subscribe the securities offered by the company at a future date, at a concessional price generally.

Taxability of Employee Stock Option Plan(ESOP)

Definitions The term grant (in relation to Employee Stock Option Plan) means the issue of option to the employee under ESOP. The grant date will be the date on which the option is issued. Vesting Period means the period during which the vesting of the option granted to an employee takes place; Vesting means the process by which the employee is given the right to apply for the shares of the company against the option granted to him under the Employee Stock Option Plan; Exercisemeans making of an application by an employee to the company for issue of shares against option vested in him under the ESOP. Exercise Periodmeans the time period after vesting within which an employee should exercise his right to apply for the shares vested in him under the ESOP.Under the Companies Act 2013, there shall be a minimum period of one year between grant of options and vesting of options, hence the exercise period cannot be less than one year from the date of grant of option. Exercise Priceis the price payable by the employee for exercising the option granted to him in pursuance of ESOP.This price is usually lower than the prevailingFMV(fair market value) of the stock. Taxation of Employee Stock Option Plan (ESOP) ESOP's will be taxed at 2 instances For Example : Mr A, an employee of A Ltd. has exercised the option of Employee Stock Option Planon 20th July 2018 due to which he has received 1000 shares of FMV Rs. 200 at Rs. 180. Readers should note that no taxability occurs at time of Grant or Vesting. Amount of Rs. 20000 will be added in his salary as taxable perquisite and will be taxed at Slab Rates. When Mr A sells the shares of A Ltd Capital Gains Shall be computed on the Same.

Sale of shares of listed Entity on Which STT is paid	Sale is done within 12 Months	STCG	Taxed @ 15 %
Sale of shares of listed Entity on Which STT is paid	Sale is done after 12 Months	LTCG	Taxed @ 10 % [ as introduced by Finance Act 2018]
Sale of shares of Unlisted Entity	Sale is done within 24 Months	STCG	Income tax slab rate
Sale of shares of Unlisted Entity	Sale is done after 24 Months	LTCG	Taxed @ 20% after indexation of cost

Calculation of Fair Market Value in case of Employee Stock Option Plan For Example : Mr A, an employee of A Ltd. has exercised the option of Employee Stock Option Plan on 20th July 2018 due to which he has received 1000 shares. Stock Exchange Analysis on19th July 2018

Stock Exchange	Volume of Trading	Opening Price	Closing Price	Average price
BSE	100000 Shares	120	110	115
NSE	50000 Shares	115	111	113

Case 1 : A Ltd is a listed Entity and it's shares are traded at both BSE and NSE on 19th July 2018 FMV in this case will be Rs. 115 Case 2 : A Ltd is a listed Entity and it's shares are traded at NSEon 19th July 2018 FMV in this case will be Rs. 113 Case 3 : A Ltd is listed on BSE but it's shares were not traded on day preceding the Exercise date i.e.on 19th July 2018 FMV in this case will be Rs. 110 This Article has been Written by CA Pratibha Goyal. She Can be reached at [email protected]