Income tax: When TDS is deductible on ESOPs given to employees
August 20, 2021
CA Chandan Agarwal's Office
ESOP or employee stock option program text on black block
When an employee is allotted ESOPs below its fair market value, the difference between fair market value and the price paid is taxed as perquisite in the hands of the employee.
I am working in a private Company. I was allotted some ESOPs in the company a few years back. I have exercised those options this year and have paid ₹5 lakh for the shares allotted to me. The company has also deducted Rs. 2.52 lakh from my salary which is reflecting in my Form 16. Why this tax has been deducted when I have paid for these shares? Is there is a way to get refund of this ₹2.52 lakh tax deducted at source?
Answer: When an employee is allotted shares below its fair market value, the difference between fair market value and the price paid is taxed as perquisite in the hands of the employee. In case of listed shares, the company is required to deduct/recover tax from the employee on the value of the perquisite computed with reference to the listed price of the shares. In case of unlisted shares, the company is required to obtain a valuation certificate for ascertaining the fair market value of its shares for the purpose of computing the value of perquisite. The TDS of Rs. 2.52 lakh represent the tax in respect of difference between the fair market value and the price at which you got these shares.
So whatever tax has been deducted by your employer is correctly deducted and you do not have any special avenue to save tax on such perquisite except the regular avenues like Section 80C, 80CCC, 80CCD, 80D etc. tax benefits for home loans etc. Please note that whenever you will sell these shares in future, the cost for the purpose of computation of capital gains will be taken the fair market value adopted for perquisite calculation and not the value which you paid for acquiring the shares so to that extent you will get the credit for the tax being paid now while computing the capital gains at the time of sale of these shares in future.
