Income tax applicability on purchase of shares after quitting USA company which is not listed
I worked for a startup for 5 years, so at the time of joining and every year during appraisal few shares were granted. After quitting the company in March 2018, I bought all of the vested shares in April 2018. There was a grace period of 3 months to exercise the stocks, so I made use of that period to buy the stock. Assume that stock is granted to me at price X and now the Fair Market Value of the same stock is Y (Y > X). Do I need to consider the difference in FMV and grant price ((Y - X) * number of stocks exercised) as income from other sources and pay tax accordingly on this? Just note that ideally profit is in theory, no money is credited to my account.
I met two CAs and they have different views:
i) If you purchase/exercise the stock when you are in the company, the transaction is a perquisite and company is liable to pay the tax and hence deducts the same from your salary. But after you quit the company, you are just investing in that stock and hence advised me to not to pay any tax now, only when you sell the stock calculate the capital gains tax and pay
ii) Other one has a different opinion and showed me clause 56(2)(x) of Income tax act and said you need to consider it as income from other sources even though no monetary gains (no amount reflcted in bank account) are seen and pay the amount by Jun 15th as advance tax.
It will be greatly helpful for me if anyone can resolove my query.
Asked 2 months ago in Income Tax from Bengaluru, Karnataka
The opinion by the 2nd CA is correct. You are required to pay taxes for the difference in FMV and exercise price in the year when options are exercised. It shall be taxed as income from other sources.
Opinion of 1st CA is correct. Now tax liability arises only when you will sell the stock in future.
As you exercise your option after employment, perquisite tax will not be levied. As per Section 56(2)(x) if you received any shares of unlisted company then difference between FMV & cost price will be taxable in your hand if FMV is > cost and difference is exceeding INR 50,000.
You may inform these income to your current employer so that he will deduct TDS considering this income then you don't need to pay advance tax.
I fully agree with the second opinion. Since yiu are getting a lower than FMV gift comes into picture. Had u been an employee in date of veating, it would have been taxable as perquisite. Now when u sell your cost will be the FMV so no double taxation.
According to me the opinion of the first CA is correct. You will need to pay tax only when you sell the shares.
Opinion of second CA is correct.
As per Section 56(2)(x) if any person receives any shares of unlisted company, then difference between FMV & exercise price will be taxable in the hands of the recepient, if such difference is more than INR 50,000.
To add to what i said earlier, the chances are the FMV is not too high as it is based on the book value of net assets largely and not any other notional value. Hence check with the company the FMV certified by their CA. Lower the FMV the better you get.
Since the shares are getting transferred to you by the clause of the employment contract with the company which was in effect when the shares vested, ideally the company should have taken care and deduct taxes on that part on the exercise date itself. It is definitely salary income as it has risen in your hand by the effect of the employment contract. Think in this way - You couldn't have possibly got any shares if you wouldn't rendered any services to your employer. If that is true then why do you think it is income post employment or other source income. No logic.
Thanks to each of you for the responses and I prefer to go with the majority opinion for couple of reasons.
i) If there is a provision like this, that no need to pay tax (FMV provisions not applicable for non-employees) after employee quits and buys the stock, then everyone prefers to do the same. They wish to buy the stock at grant price after exiting company and not worry about tax even though FMV is higher.
ii) In my case the calculated tax on profit is coming to an enormous value. If I go by first CA opinion and later found out that its wrong, I will end up in paying huge amount of penalty.
There is a follow-up query to all of you, I will be glad if you can answer:
Sir, Varun Chawla and others, at present I am working as a software consultant to a company in US and comes under section 44ada, so I have to pay my taxes by Mar 15th 2019, I believe. However for stock transaction case (this happened in April 2018) I have to pay the calculated tax by June 15th as this is income from other sources and I cannot combine this with presumable based income and pay by Mar 15th 2019.
Other question is about the sale of stock and tax rates, please correct me if my understanding is wrong: I need to hold the stock for more than 24 months to treat the profit (sale price - FMV) under long term capital gains. If it is LTCG, tax rate would be 20% with indexation. If short term capital gains (held stock for <= 24 months), I need to add this amount to my income and pay tax at slab rates.
Not sure if I get a chance to thank you all again, I am glad that all of you helped me a lot and your service is much appreciated.
Asked 2 months ago
Yes, your understanding is absolutely correct and I really appreciate your understanding on tax aspects.
Again I am repeating, opinion of 1st CA is correct as you got the shares by virtue of your employment. It was the duty of the employer to deduct TDS on it even though it has enormous value. You will be liable for capital gain.
If any non-salaried person get the shares of unlisted company for without or inadequate consideration then section 56(2)(x) can be invoked.
Yes, you are correct.
There is generally no taxable event at the time of grant and the exercise of the option.
At the time the stock acquired is sold, that will be a taxable event.
So i advise not to pay any tax as of now.
And your understanding of capital gain and its holding and calculation is correct.Its appreciable.
Hope you are doing well !
View of 2nd CA is correct.
You need to pay tax on difference amount of FMV and exercise price if difference is more than Rs. 50,000 as mentioned in section 56(2)(X).
Yes, your understanding for the tax aspect is correct.
Thanks & Regards,
Please feel free to connect in case you need assistance over computation of gains/losses on the stock options sold by you.