ESOP  is a way in which employees of a company can own a share of the company they work for and employees can receive them as a bonus, buy them directly from the company, or receive them through an ESOP.

ESOP – Perquisite

Employee stock option Plan (ESOP) is a significant employer-granted benefit that too is subject to the perquisite-based taxation system as value of benefits and other amenities is regarded as perquisites and it forms part of taxable income.

Taxable amount and when

The taxable perquisite will be the difference between the fair market value (FMV) of the shares on the date of exercise of the options less the exercise price or say,

Taxable amount = Fair market value – Exercise price

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.

Fair Market value Calculation

The fair market value (FMV) of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee shall be determined as under:

• Where shares in the company are listed on a single recognised stock exchange – FMV shall be the average of opening and closing price of shares on the date of exercise of option.

However, 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 – FMV shall be the Average of opening and closing price of the share on the date of exercise of option on a recognised stock exchange which records the highest volume of trading in the shares.

However, 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 – FMV shall be such value of the share in the company as determined by a category I merchant banker registered with SEBI on the specified date.

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.

Capital Gain – Upon transfer/sale

Upon transfer/sale of the same, capital gains tax will also be payable. The cost of acquisition of such share, debenture or warrant shall be the market value taken for computing the perquisite i.e., Capital gains will be difference between the sale price of the shares and of the aforementioned FMV.

One should also note that these provisions shall apply only in cases where the allotment or transfer of shares is made on or after April 1, 2009 that means if allotment is made prior to that date, the same continues to attract FBT. Date of allotment here means the date on which the board of directors pass the necessary resolution for making the allotment.

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