An employee stock option plan (ESOP) is a way in which employees of a company can own a share of the company they work for. There are different ways in which employees can receive stocks and shares of their company. Employees can receive them as a bonus, buy them directly from the company, or receive them through an ESOP.

W.e.f. Assessment Year 2010-11, the ESOPs which were earlier taxed in the hands of company as fringe benefits, shall now be taxable as perquisite in the hands of employees. There are three stages in Employees Stock Option Plan i.e.

Stage 1:  When the employee joins the company, he is offered shares under ESOP.

Stage 2:  After completing a time period of service, say three years, the employee can exercise the options   to get ESOPs (Acceptance of ESOP).

Stage 3:  The Company allots ESOPs (Allotment of ESOPs).

It may be noted that:

• Perquisite shall be taxable in the hands of the employee only when shares are ALLOTTED TO HIM under ESOPs. The perquisite is not taxable when employee exercises his option to ESOPs.
• However, the perquisite shall be worked out on the basis of Fair Market Value of ESOPs on the date when employee exercises his option to ESOPs.

Suppose, an employee joins the company on 01.04.2007, at that time he is offered 1000 shares in ESOP. He exercises his right to apply for ESOPs on 28.02.2009 and 1000 shares are allotted to him on 31.12.2009. Now perquisite shall be taxable on 31.12.2009 i.e Assessment Year 2010-11 when shares are allotted to him under ESOP. However, the perquisite shall be computed on the basis of fair market value as on 28.02.2009. The value of perquisite shall be determined as under:-

	Fair Market Value of the shares on the date on which				A
	option is exercised by the employee
Less:	Amount paid by or recovered from the employee in				B
	respect of the share
	Value of Perquisite taxable when shares are allotted				(A-B)

Valuation of Perquisites in respect of securities other than equity shares allotted or transferred

under ESOP

Situations	FMV of ESOPS on the date of exercise of option	Remarks
Where shares in the company are listed on a single recognised stock exchange	Average of opening and closing price of shares on the date of exercise of option	If on the date of exercise of option there is no trading in shares, the FMV shall be – the closing price of the share on any recognised stock exchange on a date closest to the date of exercise of option and immediately preceding such date of exercise of option
Where shares in the company are listed on more than one recognised stock exchange	Average of opening and closing price of shares on the date of exercise of option on a recognised stock exchange which records the highest volume of trading in the shares	If on the date of exercise of option there is no trading in shares, the FMV shall be – the closing price of the share on a recognised stock exchange which records the highest volume of trading on a date closest to the date of exercise of option and immediately preceding such date of exercise of option
Where shares in the company are not listed on a recognised stock exchange	Value on a “specified date” as determined by a Category I merchant banker registered with SEBI	Specified date means:                      the date of exercise of option;          or                                                      any date earlier than the date of exercise of option, not being a date which is more than 180 days earlier than the date of exercise of option.

Tax Returns for Financial Year 2010 -11 (March 2011) has started.  Just mail us Form16/ Salary Certificate and details of other income, at info@taxmantra.com . We would take it from there to file your return of income.

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