Taxability of Employee Stock Option Plan

Employee Stock Option Plan are equity based transactions between the owner and its employees, wherein employees are offered stake in the company after the vesting period expires in the form of shares / options at some reduced price. Initially the employer was liable to tax on such benefits offered but now it is being considered as a taxable perquisite in the hands of employees.
Taxable Perquisite
Monetary value of perquisite shall be determined on the basis of Fair Market Value of ESOPs on the date when employee exercises his option to ESOPs.
Points to be noted:

• The amount of perquisite shall be taxable on the date of allotment of shares and not on the date of exercising the option
• Fair Market Value shall be determined in the following manner:

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 a date 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 date 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 more than 180 days earlier than the date of exercise of option).

• Capital Gain tax will be attracted on sale of such shares. Capital gains will be the difference between the sale price of the shares and FMV calculated as above.