Can You Claim Indexation Benefits In Case Of ESOP Shares?

My company in India allotted me shares of the parent company as ESOP in 2001-02 at value $10.25% of the shares vested in 2002-03, 25% in 2003-04, 25% in 2004-05 and 25% in 2005-06.On the vesting dates the value of those shares was $9, $8, $7 and $6. I sold all those shares in 2007-08 at value of $12. On the vesting date since the price of the shares were lesser than allotted price, no FBT was recovered.

What is my tax liability? Will this be considered as long-term capital gains tax with gains considered as ($12-$10)*Number of shares. Can I claim indexation benefits under the same.Nitesh

Shares of a company are capital asset-whether foreign or Indian . Since all the shares allotted to you were held by you for more than one year, the shares are to be treated as long term capital asset. Sale of long term capital asset generates either long term capital gains or loss .

The determination of gain or loss is done as per the computation method prescribed u/s 48 of the I T Act which prescribes for Indexation of cost of the capital asset as given under the proviso

Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words cost of acquisition and cost of any improvement, the words indexed cost of acquisition and indexed cost of any improvement had respectively been substituted:

So, you , being a resident ,can certainly claim benefit of indexation of cost of the shares .Further , you can also claim benefit of claiming exemption u/s 54F or 54EC .

Did you read
How Cost Inflation Index Saves You Tax?
Seven Steps To Understand ESOP and Its Taxation!

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How Is The Stock Appreciation Rights Taxed?

I am working for an IT company head quartered in US, which has given me shares as part ESOP . It was granted to me in Aug 2001 @10$/share and as per company's rule, 25% of granted share was vested in Aug 2002. Pls. remember when share was granted to me or vested, I didn't purchase them. I sold those vested share in Dec. 2007 @17$ and I got the difference of granted price and selling price (i.e.7$/share) * no. of shares and company got the granted price (i.e. 10$)*no of shares. Shares are listed in NASDAQ and sold there and I got the rupees credited into my SB account in India.I would like to know the tax implications and applicability of 54F on amount received. Prakash ,Hyderabad

What you have actually got is the appreciation in the price of shares in which you had right to acquire. Such benefits given by a company to its employee comes under the term "Stock Appreciation Rights" or  SAR in short.

Why SAR ?

The devise of SAR has one benefit more than other types of stock allotment programs of a company.That is it does not require a employee to invest money before reaping the benfit of appreciation in stock prices .

Taxation issues  pertaining to SAR.

There are two  issues related to vesting of Stock Appreciation Rights as far as taxation of benefit due to  SAR is concerned

1. Perquisite in hands of employee
2. FBT payment by company issuing SAR
3. taxation of income out appreciation in share price (difference ) which an employee gets at the time of sale.

Is SAR a taxable perquisite in hands of employee?

Since ESOP has been made taxable under Fringe Benefit Tax , benefit on account of grant of SAR is not taxable in hands of employee.

     However, if the benefit of SAR for any reason is not taxable under FBT, same is taxable under section 17(2) by virtue of clause (vi) of the I T Act.

Taxation of Income On Exercise of Sale of Rights

When an employee exercise rights of SAR and claims the gain i.e  difference between the price of allotment and the price on the date of exercise , such gain is taxable under I T Act .  The first case related to SAR was decided by Income Tax Tribunal , Mumbai in case of Sumit Bhattacharya v. Assistant Commissioner of Income-tax Circle 16(1), Mumbai [2008] 19 SOT 663 (Mum.)(SB) / 113 TTJ 633.

Facts of the case was that The appellant taxpayer was, at the material point of time, i.e., in the previous year ending 31-3-1998, employed as Managing Director of the Procter & Gamble India Limited (hereinafter referred to as 'PGI') which is a part of the group of companies headed by Procter & Gamble Co., Inc., USA (hereinafter referred to as 'PGU'). There is no dispute about the fact that in January 1998, the assessee received a sum of US$ 12,38,084.02, which was equivalent to Rs. 4,79,13,851.58, from PGU on account of redemption of certain stock appreciation rights granted in October 1997. The assessee claimed the receipt as non taxable under I T Act on various ground.Both A.O and CIT(Appeal) did not agree with the assessee and taxed the income as salary.

Then the assessee approached the Tribunal which held the sum received by the assessee as taxable under the head "Salary" even though the SAR was given the Proctor & Gamble ,USA of which the assessee was not an employee.

The tribunal , even otherwise held that if the appreciation receipt is not taxable under the head of "Salary" , the same should be charged to tax under the head "income from other sources". In words of Tribunal

we have come to the conclusion that redemption of stock appreciation right is an employment-related benefit, in the nature of deferred wages contingent upon financial performance of the ultimate employer, i.e., parent company of the company with which the assessee has entered into employment contract, which is a purely monetary benefit. The same is directly of the income nature. As for the reliance placed by the learned counsel for the assessee on the judgments in the cases of N.A. Mody (supra) and T.P. Sidhwa (supra), in support of the proposition that an employment-related benefit cannot be taxed under a head other than 'income from salaries', we find that Hon'ble Supreme Court has duly considered these judgments and yet come to the conclusion that when an employment-related benefit is received from a person other than the employer, the same is taxable under the head 'income from other sources'.

Answer to your specific question

Your gain is to be taxed as income from other source . The same is not a capital gains, no exemption u/s 54F can be claimed.

In fact the , assessee in aforesaid case also raised this issue that at best the appreciation be taxed under capital gains , which the Tribunal turned down on following grounds

As regards assessee's plea that the amount in question can only be taxed under the head 'capital gains' as the receipt is on account of transfer of a capital asset consisting of right to receive stock appreciation rights, we see no substance in the same for the simple reason that, as we have held earlier in this order and as the very preamble of Procter & Gamble (1983) Stock Plan itself states, the amount in question is in the nature of a deferred wages, in the genus of bonus, incentives and like, received as a fruit of employment-related activity which is revenue receipt in nature, and it is only the quantification of this amount which is linked to a capital asset that is value of shares. The taxability is not in respect of the stock appreciation right per se but the amount received as a fruit of employment which is measured by way of a formula envisaged in the stock appreciation rights scheme.

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Rule For Valuation Of Specified Security For FBT Notified!

A News You Can Use

CBDT has notified new rules for valuing the specified securities for the purpose of fringe benefit tax. The rule 40D given below is self explanatory

[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY,

PART -II- Section 3- Sub-section (ii)]

GOVERNMENT OF INDIA

MINISTRY OF FINANCE

(Department Of Revenue)

(CENTRAL BOARD OF DIRECT TAXES)

Notification

New Delhi, the 18th January, 2008

INCOME-TAX

S.O. 113(E). – In exercise of the powers conferred by section 295 read with Explanation (i) to clause (ba) of sub-section (1) of section 115WC of the Income-tax Act, 1961 (43 of 1961), read with section 22 of the General Clauses Act, 1897 (10 of 1897), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1. (1) These rules may be called the Income-tax (Second Amendment) Rules, 2008.

(2) They shall come into force with effect from the 1st day of April, 2008.

2. In the Income-tax Rules, 1962, in Part VII C, -

(i) in rule 40C, in sub-rule (4), clause (f) shall be omitted; and

(ii) after rule 40C, the following rule shall be inserted, namely:-

“Valuation of specified security not being an equity share in the company.

40D. For the purposes of clause (ba) of sub-section (1) of section 115WC, the fair market value of any specified security, not being an equity share in a company, on the date on which the option vests with the employee, shall be such value as determined by a merchant banker on the specified date.

Explanation.- For the purposes of this rule, “merchant banker” and “specified date” shall have the meanings assigned to them in clause (b) and clause (e) respectively of sub-rule 4 of Rule 40C.”

[Notification No. 11/2008/F.No.142/25/2007-TPL]

SOBHAN KAR, Under Secretary.

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CBDT Issues Circular On FBT on ESOP With 25 FAQs .

The Central Board Of Direct Taxes has released a circular Circular No 9/2007 dated 20/9/2007 which contains 25 frequently asked questions on ESOP. The excerpt of the circular is given below for the benefit of readers

Frequently Asked Questions

A number of issues have been raised by trade and industry at different fora after the presentation of the Finance Bill, 2007, after its enactment and also after the notification of Rule 40C. The questions and answers in the following section seek to clarify these issues:

1. Whether a foreign company is liable to pay FBT on shares allotted or transferred to the employees of its Indian subsidiary?

Answer In terms of the provisions of Chapter XII-H of the Act, an employer, being a company, is liable to pay FBT in respect of the fringe benefits provided or deemed to have been provided by it to its employees, directly or indirectly, during the previous year. Since the shares are allotted or transferred to employees of the Indian subsidiary, by virtue of their employment with the subsidiary company, the liability to pay fringe benefit tax on such shares vests upon the Indian subsidiary and not on the foreign company.

2. Whether charge back of costs by the foreign company to the Indian subsidiary is relevant to determine the obligation of the Indian company to pay FBT?

Answer: As stated in answer No.1, the Indian subsidiary is liable to fringe benefit tax irrespective of whether or not there is a charge back of cost by the foreign holding company.

3. Will FBT apply in case of employees of the Indian subsidiary for shares awarded by the foreign holding company if the employees of the Indian subsidiary are allotted or transferred shares while outside India?

Answer: In the answer to Question No.20 of CBDT Circular No. 8/2005 dt.

29.8.2005, it has been clarified that an employer is liable to fringe benefit tax on the value of fringe benefits provided or deemed to have been provided to employees based in India. Therefore, an Indian subsidiary would be liable to pay FBT in respect of the value of the shares allotted or transferred by the foreign holding company if the employee was based in India at any time during the period beginning with the grant of the option and ending with the date of vesting of such option (hereafter such period is referred to as ‘grant period’), irrespective of the place of location of the employee at the time of allotment or transfer of such shares.

4. How will the value of fringe benefit be determined in case where the employee was based in India only for a part of the grant period?

Answer: In a case where the employee was based in India only for a part of grant period, a proportionate amount of the value of the fringe benefit will be liable to FBT. The proportionate amount shall be determined by applying to the value of the fringe benefit, the proportion which the length of the period of stay in India by the employee during the grant period bears to the length of the grant period.

(The value of fringe benefit means the fair market value of the specified security or sweat equity shares, on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of such shares.)

5. Whether a foreign company is liable to fringe benefit tax in respect of shares allotted or transferred to an employee who is deputed to work in India in the year of such allotment or transfer?

Answer: A foreign company is liable to FBT in respect of shares allotted or transferred to its employee who is based in India. However, in such cases only a proportionate amount of the value of the fringe benefit will be liable to FBT. The proportionate value shall be determined
by applying to the value of the fringe benefit, the proportion which the length of the period of stay in India by the employee during the grant period bears to the length of the grant period.

(The value of fringe benefit means the fair market value of the specified security or sweat equity shares, on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of such shares.)

6. What will be the cost of acquisition of shares, referred to in question nos 4 and 5, where only a proportionate value of fringe benefit has been subjected to FBT?

Answer:- In accordance with section 49 (2AB) of the Act, the cost of acquisition of such shares shall be the fair market value on the date on which the option vests with the employee. The calculation of fringe benefit for the purpose of determining FBT does not change this value. Hence, the subsequent calculation of reducing such fair market value by the amount actually paid by or recovered from the employee as well as the calculation of proportionate value in certain
cases, referred to in Question No.4 & 5 above, will not change the cost of acquisition.

7. Where the benefit on account of shares allotted or transferred under Employee Stock Option Plans (ESOPs) is taxed in the hands of the employees in different countries, would the employer still be liable to FBT? If yes, can the employer claim credit for payment of tax by the employee in other countries?

Answer: Employer will be liable to FBT in India irrespective of whether employees have been charged to tax in different countries or not. An employer cannot claim any credit in India against its FBT liability for taxes paid by employees in other countries.

8. Where FBT, on account of shares allotted or transferred under ESOPs, has been paid by the employer in respect of an employee based in India and subsequently recovered from him, can such employee claim credit in a foreign country for this FBT paid by the employer in India?

Answer: Ordinarily, the employee is liable to tax in respect of fringe benefits received by him from his employer. However, the taxation of fringe benefits in the hands of the employee raises several problems. Accordingly, it was decided to introduce FBT as a surrogate tax on employer in respect of the fringe benefits provided or deemed to have been provided by it to its employees during the previous year. This being so, in a case where FBT, on account of share allotted or transferred ESOPs, has been paid by the employer in respect of an employee based in India and subsequently recovered from him; the FBT is effectively paid by the employee in respect of fringe benefits enjoyed by him. Therefore, such employee can claim credit, in a foreign country, for the FBT, on account of shares allotted or transferred under ESOPs, paid by the employer in India.

9. Whether the benefits arising on account of shares allotted ortransferred under ESOPs can be taxed as a perquisite under section 17 of the Act instead of being taxed as fringe benefit under Chapter XII-H of the said Act, at the option of the employer?

Answer: Any fringe benefit liable to be taxed in the hands of the employer under Chapter XII-H of the Act cannot be taxed in the hands of the employee as a perquisite under section 17 of the said Act. Therefore, an employer does not have an option to tax the benefit arising on account of shares allotted or transferred under ESOPs as perquisite which otherwise is to be taxed as fringe benefit.

10. Whether there will be any FBT liability in a case where the FMV on the date of vesting is less than the price paid by the employee to the employer for allotment or transfer of shares?

Answer: No. FBT would not be payable in such cases.

11. What will be the valuation methodology for foreign companies if the shares are not listed in a recognized stock exchange in India but are listed on any globally recognised stock exchange?

Answer: If the shares are not listed in a recognized stock exchange in India,the shares will be treated as unlisted. Accordingly, such shares will have to be valued by category 1 Merchant Banker registered with Securities and Exchange Board of India. However, if the shares are listed in any globally recognised stock exchange, the merchant banker shall use the listed price as one of the basis for valuation and recommend the best value.

12. Whether an independent valuation carried by any foreign merchant banker/other experts as recognized for the purposes of valuation in the foreign country be treated as sufficient compliance for the purposes of valuation of fringe benefit arising on account of allotment or transfer of shares under ESOPs of an unlisted foreign company or is it mandatory that the merchant banker should be registered with the Securities and Exchange Board of India.

Answer: For the purposes of valuation of fringe benefit arising on account of allotment or transfer of shares under ESOPs of an unlisted foreign company, it is mandatory for the valuer to be a category I Merchant Banker registered with the Securities and Exchange Board of India.

13. When there exists different methods for valuing FMV for unlisted companies, which method should be used by the merchant bankers to determine the FMV?

Answer: The Merchant Banker should determine the FMV on the basis of alternative methods and recommend the most appropriate value.

14. What is the significance of specified date? Whether the valuation is to be made on a specified date or specified security or sweat equity share is to be valued as on the specified date?

Answer: The process of valuation may be carried out by the merchant banker at any time before or after the date of vesting of the option, but the specified security or the sweat equity share is required to be valued as on the specified date.

15. What is the FMV that a company should adopt if the shares have been valued by more than one merchant banker or by one merchant banker on more than one occasion?

Answer: The valuation which value the specified security or sweat equity share on the specified date, which is closest to the date of the vesting of the option, should be adopted, if the shares have been valued by more than one Merchant Banker or by one Merchant Banker on more than one occasion.

16. Whether the fringe benefit arising on account of shares allotted or transferred under an ESOP is allowed as deduction in calculating the taxable income of the employer company?

Answer: In case where the employer purchases the shares and then subsequently transfers such shares to its employees, the expenditure so incurred is allowable as deduction in computing the
taxable income of the employer company. However, if the shares are allotted to the employees from the share capital of the company, no deduction is allowable in computing the taxable
income of the company since no expenditure has been incurred by it.

17. Whether ESOPs issued to non-executive directors or non- employees liable to FBT?

Answer: Benefit arising out of ESOPs issued to non-employees will not be liable to FBT. However, in such cases, the taxability of such benefits in the hands of the non-employees will be determined in accordance with the existing law.

18. Which method, first-in-first-out (FIFO) or last-in-first-out (LIFO)shall be followed in case there are multiple date of vesting for different number of shares. For example if the dates of vesting are:

31 Mar 06 - 300 options - FMV Rs. 8 per share ( one share per option)

31 Mar 07 - 300 options - FMV Rs. 9 per share ( one share per option) and the employee is allotted 500 shares as on 30 September 2007, how will FBT be calculated?

Answer: In such cases, the First-in-First-Out (FIFO) method shall be followed. Hence, the FBT shall be calculated with respect to 300 shares at FMV of Rs 8 per share and 200 shares at FMV of Rs 9 per shares.

19. Whether it is binding upon the Assessing Officer to accept the valuation made by the merchant banker?

Answer: It is binding upon the Assessing Officer to accept the valuation made by the Merchant Banker unless the valuation by such banker is perverse.

20. How would the recovery of FBT be treated in the hands of the employer?

Answer: Since FBT is not an allowable deduction in computation of the income of the employer, any recovery of FBT will not be treated as income in his hands.

21. What should be the mechanism and timing of recovery of FBT?

Answer: The law does not provide for any specific mechanism or timing of recovery of FBT.

22. Is it lawful for the employer to recover FBT with respect to ESOPs granted prior to April 1, 2007?

Answer: It would be lawful for the employer to recover FBT with respect to ESOPs granted prior to April 1, 2007, but allotted or transferred to the employee after such date.

23. What will be the date of allotment of an Employee Stock Option?

Answer: The date of allotment of an Employee Stock Option shall be the date on which the underlying asset is allotted or transferred to the employee

24. Whether the FBT recovered from the employee would form the cost basis for employee for calculating Capital Gain on subsequent sale of shares?

Answer: No. The recovery of FBT from the employee by the employer will not change the cost of acquisition of the shares in the hand of the employee.

25. Will Rule 40C of Income-tax Rules, shall also apply in a case where shares are allotted or transferred to an employee under “Employee Stock Purchase Plan”, or “Employee Stock Option Scheme”, or “Employee Stock Ownership Plan”, or “Employee Stock Purchase Scheme”, or “Employee Stock Option Scheme” or “Employee Appreciation Rights or Plans”?

Answer: Rule 40C shall apply in all cases where specified security or sweat equity shares, being shares in a company, are allotted or transferred to an employee under any scheme or plan or otherwise.For the purpose of this circular an Employees’ Stock Option Plan shall include all such schemes or plans, etc. "

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How Can ESOP Shares Become Taxable Perquisite ?

1. I am in employment with a company since Jan 2002. 2. the company included me in an ESOP scheme where in shares were to vest in installments between 2004 and 2008 in Septmber each year 3. In March 2007 early vesting of ESOPs was undertaken and ESOPs due in Sep 07 and Sep 08 were fully vested and exercised in March itself.4. In lieu of an early exercise the Employees were required to sign a voluntary undertaking to pay a sum of Rs 14 lacs calculated with reference to ESOPS vesting in Sep 08 in case the employee exited the company prior to Sep 08, which I signed. 5. On Oct 5 2007 I resigned with due notice of 2 months.

The question is 1. will the payment of Rs 14 lacs to my Employer by me be treated as Salary income for TDS computation. This payment is not being reimbursed to me by anyone so this question. Are there any case laws supporting the argument that it should be treated as Salary income. Alternately can I claim this as salary income and claim refund later if the company does not include it in my form 16 but i take a stamped receipt for the payment. The company has clearly told me that it is not to be construed as cost of acquisition of shares since they are not treating it as a capital receipt for acquisition of shares. Please advice Krishnamurthy Raghuram

I am afraid , the payment made by you does not fall under the definition of salary. In fact this payment is a receipt of company employer and not yours. The payment which you have given to your employer is as per your voluntary undertaking to serve the company till Sept 2008 which you did not do. Therefore, the payment is a kind of penalty on you for leaving the job. For this reason , the company may also not reflect this amount in Form 16 .

As far as refund is concerned ,if you mean to claim refund from government , it is just not possible. The government refunds money what is paid to it. The Rs 14 lakh payment was made to the company employer by you. This payment has not come into the kitty of the government .Therefore, there is no question of refund from income tax department.

However, I find that there is another issue which I must make you aware of. The rush to prepone the vesting of share under ESOP by many companies were on account of Fringe Benefit Tax which was applicable for any shares vested after 1/4/2007 . In your case also , the shares which were scheduled to be vested in Sept 2007 and Sept.2008 were preponed to March. Therefore, the issue whether in such rush of preponing the vestment of ESOP shares and exercise , the company has made all employees who were granted ESOS shares liable to perquisite.

I have not read the terms and conditions of the ESOP scheme of your former company but all should note following points regarding ESOP scheme and taxation rules associated with it.

Section 17(2) of the I T Act provides that shares given to employees at a discounted price is not taxable if the same is given under any Employees Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government . Clause (2 )of the ESOP or ESOS guideline by the government published vide Notification SO 1021 (E) dt .11/10/2001 lays down conditions as under

(2) Any such Plan or Scheme shall be incorporated in a written document specifying,
the following, namely:-

i) The total number of shares that may be issued under such plan or scheme.
ii) The class of employees who would be entitled to participate in such plan or scheme.
iii) The pricing formula on the basis of which shares would be allotted to the employees, including the price at which such shares are offered at the time
of grant or exercise of option.
iv) The number of shares or stock equivalent which would be issued to any employee or classes of employees and the basis of such award, if any.
v) The period by and the manner in which the approval of shareholders would be obtained.
vi) The lock in period of such shares from the date of option or exercise of option or purchase of shares under such scheme or plan, as the case may
be.
vii) If the shares are unlisted, the basis of valuation of shares with reference to
the company’s account for the last three financial years and a brief explanation as to how the basis was arrived at.
viii) The conditions relating to restriction on non-transferability of such shares.

Provided that the conditions contained in the written document shall not be changed after the date the scheme or plan comes into effect.

The last proviso (in bold ) is very important. The guidelines says once conditions in the documents once finalised , conditions can not be changed. I do not know if any conditions documented a copy of which was submitted in the office of jurisdictional commissioner of income tax , was changed when the vesting and exercise was preponed. If that was changed, then the ESOP or ESOS shares at a discounted price shall be taken as perquisite in the employees hand because exemption from being charged to tax is only if it is according to guidelines and not contravening it. That will be more unfortunate for everyone who got ESOP shares in March 2007.

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Are Capital Gains On Sale Of ESOP Shares Listed Abroad Exempt?

I am an Indian resident, and had some ESOPs which I had exercised and paid in January 2004. These were paid in USD and money on sale will also come in USD, the company went public in October 2006. What is the capital gains tax rate that will apply to me on sale of shares (listed on NYSE), if I sell after October 2007 or before October 2007? Virender Puri

Shares whether quoted or unquoted become long term asset after being held for more than one year. You exercised your option in January 2004, therefore after January 2005, shares became long term asset in your hand. Its sale will give rise to long term gains.

Since you are resident and the shares are listed outside India , the tax rate applied in this case will be 20% as per section 112 of the I T Act . The NIL tax rate for long term gains is for shares which are sold through stock exchanges registered in India.However, you can claim indexation on the cost of the share. For more on indexation , read here.

For computation of capital gains, you will have to convert the foreign exchange in Indian currency . The Rule 115A of the Income Tax Rule prescribes as under:

The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date.

As per Rule 26 , "telegraphic transfer buying rate" means the rate (or rates) of exchange adopted by the State Bank of India for buying such currency.

And for"Capital gains", "specified date" means the last day of the month immediately preceding the month in which the capital asset is transferred.

So, when you sale the foreign listed shares,take following steps:

1. Convert purchase and sale price in Rupees by taking the TT rate of SBI (Ask any SBI official ).
2. Compute indexed cost.
3. Reduce Indexed cost from Sale price
4. Compute tax @20 % of (3)

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How Is Sale Of Foreign Listed ESOP Shares taxed ?

1. I want to understand the tax implication on ESOPs. One of my friend's has got ESOPs of MNC listed in the US. He has sold the same & has made capital gains (long term) because of the same. What would be the tax implication on cases like this. ganesh.narayanan@...........com
2. I work for a MNC's indian subsidiary and I got ESOPs of the parent company. I have sold the shares in 2006. These shares are sold in NASDAQ in US. I have recieved dollars. How much should be tax? One chartered accountant told us that these are capital gains and according to DTAA, these capital gains should be taxed in US and I dont need to pay anything in India. Others say that it is part of global income so it should be paid at 33%. Some one else say that I should pay 20% and have the benefit of indexation. I am confused. I don't want to break laws and at the same time pay unnecessary tax. ppalla@.........com
3. How are the ESOPs for MNC's listed abroad taxed in hands of employee? How much tax has to be paid and which section in IT law deals with this?Rajeev Bhatia
4. I am a salaried person having income from salary, and from the sale of ESOPs (the company is *not* listed in India). I've heard that income from sale of ESOPs of companies that are listed abroad is treated as other income and subject to tax as such. Similarly, income from derivatives trading also counts as other income.
   The question is that is it possible to offset losses in derivatives trading in any way?Ramesh Kumar

All these questions are pertaining to same issues and related to ESOP, therefore being answered together.I have already explained regarding the ESOP under three earlier articles. Read it here .

The basic questions asked by all these readers is regarding the taxation of the shares received under ESOP scheme from a foreign company listed in foreign stock exchanges .Let us first of all understand that the foreign company which has a company registered in India , whether private or subsidiary , is allowed to issue & allot shares under ESOP scheme. If the foreign company has allotted shares listed outside India under such scheme to an employee of its Indian subsidiary , three issues arise -perquisite,FBT & capital gains.As the questions demands answers regarding capital gains , I concentrate only on that issue .

The shares of foreign parent company received under ESOP scheme are definitely capital asset under Income Tax Act. If you hold these shares for one year after allotment  ,the result will be long term capital asset. If you sale those foreign company shares after one year , the gain will be taxed as long term capital gains tax as per section 112 read with section 48 of the I T Act.

However this long term capital gains will not be tax free but shall be charged tax at the rate of 20% as specified in section 112 of the I T Act. The reason is that the long term capital gains tax in case of shares listed in India becomes tax free if the same is sold through stock exchange and securities transaction tax is charged on that .In case of foreign listed shares, these conditions are not satisfied . Therefore, the sale will suffer tax at normal rate of tax i.e 20% for long term capital gain tax as stated in section 112 of the I T Act.

However, one can claim indexation benefit u/s 48 and also the scheme of section 54EC and 54 F shall be available to anyone(Individuals & HUF ) having long term capital gains .

Point to note

• Section 112 also provides that in case some one does not claim indexation benefit while computing long term capital gains on listed shares or units , tax shall be charged @ 10 %. This benefit is not available to anyone having foreign listed shares SIMPLY because it is not listed in Indian stock exchange.
• Many time it happens that the foreign company which has India presence and allots shares under a ESOP scheme forgets to abide by the procedure led down in this regard. The employees who are allotted the shares are totally oblivious of this fact. At the time of assessment, when the assessing officer starts checking if the shares were allotted as per ESOP scheme notified by the government and finds that certain procedure were not followed, he may add the value of benefit as on the date of vesting as perquisite also. Be care full to talk to your finance department in this regard.
  

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Is Sale of Shares Listed Abroad Tax Free?

If a MNC gives ESOP to its Indian employees (Indian subsidiary) which are listed abroad, what kind of tax is applicable on the sale of the share options once the funds (after sale) is transfered back to India. If so what is the tax rate. kavee_india@......com

There is a fully owned US subsidiary in India and employees are given stock options having vesting period spread over 4 years. India employees are provided parent company shares under stock option.1 Whether the current proposal to tax ESOP applicable to the US Subsidiary in India ( FBT ) 2. IF yes, can the tax liability passed on to employees as perquisite krish_nayak@.....com

Both these questions are answered together .Two issues are involved in both question are

1.Whether FBT on ESOP is applicable on foreign companies?
2.Taxation of sale of shares of foreign company listed abroad received under ESOP ?

1.Whether FBT on ESOP is applicable on foreign companies?

Yes, it must be clear that fringe benefit tax is applicable on foreign companies having employees based in India. Answer 22 of circular 8 of 2005 issued by CBDT clarified it

Does FBT apply to foreign companies?
22. FBT will apply to foreign companies if it has employees based in India.

Therefore, now that ESOP has brought within ambit of Fringe Benefit Tax vide section 115WB(1)(d) effective from 1/4/2007, the foreign companies have to pay FBT .Under the new provision they can recover the FBT from employees. Since the FBT is charged , there is no question of employee being taxed on the same amount in the name of perquisite.

Sale of Shares Listed Abroad
The next question which remains to answer is regarding taxation of sale of alloted shares of the foreign companies listed outside India . Following facts emerge

• 1. The shares are capital assets under I T Act.
• 2. Employees are having status of "Resident"in India.
• 3. The sale of shares take place outside India.

Since , global income of a Resident person is chargeable to tax under Income tax Act, the gains on the sale of shares shall definitely be taxable in India. However, unlike Indian listed shares , the capital gains in this case ,even if it is long term , is not tax free . Readers should read this posting to understand how the gains on sale of ESOP shares of Indian stock exchange listed companies are tax free. And gains does become taxable the moment it is earned and even if not brought in India.

However, in my opinion ,there may be different scenario if the employee who got shares of the foreign listed company as part of ESOP becomes non resident , sells shares outside India and also receives sale consideration outside India. But can you stop taxmen of that country from coming to your door for their pound of flesh !

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How to Make Gain On ESOP Shares Sale Tax Exempt?

ESOP has come into focus once again on account of its inclusion as benefits chargeable to fringe benefit tax. To know more about it click here.As far as , employees are concerned , newly inserted provision prescribes for tax on capital gain arising at the time of sale or transfers. However, for those employees who are given shares of companies which are listed on India stock exchange need not worry if they be patient a bit. Two simple steps should be adopted for making the gains non taxable. These are :

1. Do not sell the shares within a year of being vested by the company". This will make those shares as long term capital assets. and
2. Sale only through stock exchange.

This will make the long term capital gains on the sale of the ESOP shares tax free on account of exemption provision in section 10(38) which is given as under :

"(38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter "

And you live taxworry free ever after!

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Seven Steps To Understand ESOP and Its Taxation!

1.What is ESOP ?

ESOP is short form of Employees Stock Option Plan. Under this plan, companies provides employees a plan by which the employees get an option to acquire shares of their employer company over a period of time at a reduced price or nil price. Therefore ESOP is primarily a kind of incentive to hold the employees to the company's fold .Therefore, question of taxing this perquisite and capital gains at the time of sale of shares received by the employees arise.

2.What are the new taxation scheme of ESOP?
The new scheme of taxation of Employees Stock Option Plan initiated by Finance Bill passed on 11th May 2007 and effective from 1/4/2007 is as follows

1. No taxation of perquisite in hands of employees.
2. Employer to pay Fringe Benefit Tax at the time vesting of shares in Employees.
3. Employee to pay capital gains tax at the time of sale of shares received under ESOP.

3.Fringe Benefit Tax To Be Paid By Employer

Section 115WB1(d) has been inserted in the I T Act to bring ESOP under FBT . The said provision and explanation therein made it explicitly clear that ESOP is under FBT

any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees).

4. How the value for fringe benefit on ESOP computed?
Section 115WC(1)(ba) gives the method of valuation of ESOP for the purpose of imposing fringe benefit tax. The said provision under 115WC(1)(ba) is as under

the fair market value of the specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB, on the date on which the option vests with the employee as reduced by the amount actually paid by, or recovered from, the employee in respect of such security or shares.

What the aforesaid provision states in simple terms is

1. Fair market value (FMV) of shares has to be taken for valuation purpose.
2. The valuation date for FMV is the date on which the shares are vested in employee.
3. The value of fringe benefit shall be FMV reduced by amount paid by employee.
4. The FBT will be charged @ 33.99%

5. How the Fair market value is determined?
As per explanation, Central Board of Direct Taxes will come out with method of Fair Market Valuation . CBDT has not come out yet.But one should expect that FMV shall be almost equal to average rate on either NSE or BSE on the date of valuation.

6.What is this vesting of shares?

Under ESOP , an employee is given an option of buying the share of companies at a reduced priced. The Option is a Right but no obligation. Therefore , date of vesting of shares means
the date when the company allots shares to employee.

7. What happens when employee sells the shares received under ESOP?

The gains shall arise on sale of those shares. The value of capital gains shall be computed by reducing the cost of acquiring such ESOP shares from the sale consideration. For determining the cost of acquisition section 49(2AB ) has been introduced from 1/4/2007 so as to provide that fair market value taken for computing the FBT by the employer shall be taken as COST of acquisition of shares. The exact wordings of section 49(2AB) is as under:

Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account while computing the value of fringe benefits under clause (ba) of sub-section (1) of section 115WC.

Let us take an example.

A company announces an ESOP plan under which company will allot 500 shares of company to certain employees at a price of Rs 100. Those eligible employees will have option of getting allotment of 100 shares on 1st day of October every year starting from 1/4/2007 for next five years.Let us say, Mr X an employee fills out the ESOP application form on 1.7.2007 for allotment of shares . He is allotted 100 shares on 1/10/2007 . The market value on 1/10/2007 , (vesting day) is RS 500. These 100 shares , let us think , hypothetically, sold by the employee on 31/3/2009 at a price of RS 1200. Then

FBT to be paid by the employer company will be 33.99% on (Rs500-Rs 100)x 100 nos=Rs 16000.Since the vesting date is 1/10/2007 ,FBT will be paid in the year of vesting i.e FY 2007-08 .

There will be long term capital gain on 31/3/2009 since the the shares allotted on 1/10/2007 are hold for more than one year. The long term capital gains shall be computed as under

Sale consideration RS 1200 x 100 = Rs 1,20,000
Less

Cost of acquisition is FMV for FBT purpose i.e Rs 500x 100 =Rs 50,000

Long Term Capital Gains = Rs 70,000

Please note

• for simplicity , indexation of cost has not been done otherwise indexation benefit shall be given in case of long term gains and that will substantially reduce the tax liability.
  
• The tax on sale of shares may be nil if aforesaid shares are sold through stock exchange by paying securities transaction tax because long term capital gains on shares are exempt from tax.
  

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