Employees Stock Option Plan (ESOP) has become a common tool for many companies to attract and retain talent
Employees Stock Option Plan (ESOP) has become a common tool for many companies to attract and retain talent
A right is granted by the company to certain employees to purchase a specified amount of stock in the company over a specified period at a pre-determined price (exercise price), under an ESOP plan, however, there is no obligation on the employees to purchase the same. Employees Stock Option Plan (ESOP) has become a common tool for many companies to attract and retain talent.
With such compensation, comes taxes as well. The taxation takes place at the time of exercise when shares are allotted and then later when the shares are sold, explained Kuldip Kumar, Partner – Price Waterhouse & Co LLP.
ESOP income taxed as employment income at the first stage is taxed at normal slab rate plus applicable surcharge and education and health cess. Whereas, income is taxed as capital gains at thsecond stage.
Tax saving opportunities
“The taxes can be deferred if not saved when it comes to ESOP by stretching the exercise period a bit longer and making it in parallel to the event of the sale in the open market. By doing this, the outflow of tax through deduction of withholding tax can be mitigated through money from the sale of shares in the market. The capital gains on such sale of shares do not have any immediate tax effect and need to be included in the computation of tax at the time of filing of annual income tax return,” said Saurrav Sood, Practice Leader (International tax), SW India.
“In order to save tax on LTCG, employees can explore saving capital gains tax by reinvesting the capital gains into specified securities u/s 54EE (Maximum limit Rs. 50 lakhs) of the Act or investing the sales consideration in a residential house u/s 54F of the Act, subject to meeting the specified conditions as contained in Section 54EE and 54F respectively,” said Kumar of Price Waterhouse & Co LLP.
In case of employees of eligible start-ups, there is a relaxation provided by deferring the payment of tax arising on the date of exercise/allotment.
The tax is deducted/paid for these employees on the employment income earned from exercise of option within 14 days from the earliest of the following events – Expiry of 5 financial years from the end of the relevant financial year in which the shares under ESOP have been allotted, or date of the employee leaving the employment, or date of sale of such shares.
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