Tax Implications of Stock Incentives

EVENT TAX IMPLICATION ON EMPLOYER TAX IMPLICATION ON EMPLOYEE
Granting of ESOPs, i.e., when the company/startup issues a grant letter to the employee setting out details of ESOPs granted to the employee.

NIL

 

(This is because there is no monetary transaction being conducted at this stage. Additionally the employee only gets an option to buy shares at the time of grant)

Vesting of ESOPs, i.e., when employee fulfills the conditions stated in the grant letter and becomes eligible to purchase shares of the company)

NIL

 

(This is because there is no monetary transaction being conducted at this stage. Additionally the employee only gets the right to buy shares at this point)

Exercise of ESOPs, i.e., when the employee actually purchases shares in the company/startup Employer may have to deduct TDS (withhold tax) on the additional perquisite value, in accordance with Section 192 of the Income Tax Act, 1961. Difference between the Fair Market Value (“FMV”) of shares on the date of exercise of option and amount paid by employee, shall be taxable as ‘perquisite’ under Section 17(2)(vi) of the Income Tax Act, 1961.
Sale of shares (where shares were held for less than 36 months by the employee), i.e., when the employee sells shares held by him NIL Difference between the sale price and the FMV of shares on the date of exercise would be treated as short-term capital gains. Gains would be taxable as per the ‘normal slab rate’ applicable to an individual under the Income Tax Act, 1961.
Sale of shares (where shares were held for more than 36 months by the employee)  i.e., when the employee sells shares held by him NIL Difference between the sale price and the FMV of shares, on the date of exercise would be treated as long-term capital gains.

 

 

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