I have ESOP in an unlisted company with following treatment: ESOP stocks will be allotted to the employees. Once the stocks are vested then the option will be provided to the employees to convert the stocks to equivalent money. We call this activity as buyback program/Cancellation of Stocks. Based on the option selected by the employees the stocks allotted will be cancelled and the equivalent amount will be calculated in USD and based on the transaction date we convert the amount in INR and process it to employees Bank account. In this entire ESOP activity there is no market transaction. And the amount payable to the employees is in addition to the salary. As it is an additional benefit over and above the salary we report the income under “Profit in lieu of Salary”. The above understanding was provided by my company. My question is: 1. ITR-2 asks for the stocks/investment you hold in Unlisted company. Does the stocks allotment based on the performance and not an investment needs to be declared in ITR? 2. Once I leave the organisation, the vested stocks but not exercised, Will it be considered as investment then?
No since the stocks have not been vested in your name and you still just have option to hold them it wont be covered.
If you havent exercised you cant sell them so it wont be your investment if you vest them then it would be included in your salary as perquisite.
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Naman, Thanks for the quick response. Need to clarify the question. - I have exercised few options and have received it as part of salary. TDS has been deducted on it. However, I still have some vested and unvested stocks - Do I need to declare rest vested or unvested stocks in ITR? - When I leave the organisation and still keep my vested stock for future buyback program - How will the money received then be taxed? It may not be counted as salary as I will be working in other organisation. Do I need to consider this as income from other source at that point? Does (not) declearing have any implication at later stage.
You need to declare only those stocks which you have exercised and which have been transferred to your name. There must be options which would have vested but till the time you dont get it transferred to your account you dont need to show it.
When you sell these stocks or when the company buy back the stock from you need to pay capital gain tax on same and the TDS deducted by foreign company can be claimed as credit in your return of income.
In case of buy back by a domestic company same is exempt in the hands of assessee.
Dear Sir,
Hope you are doing well !!
1.No, there is no need to declare it in ITR.
Upon allotment of shares after the employee exercises his option on the completion of the vesting period.
Upon allotment of shares, the employer will have to compute the perquisite value of ESOP taxable in the hands of the employee under “income from salary” and deduct tax on such ESOP. The perquisite value and the tax deducted thereon by the company would be reflected in Form 16 and Form 12BA of the employee and treated as income from salary in the tax return.
2. No, it will not be considered as investment.
Dear Sir,
There can be two stages with respect to levy of tax on shares allotted under ESOP:
1. First levy occurs when shares are allotted to the employee after he has exercised his option on completion of the vesting period and
2. Second levy occurs when the employee opts to sell the allotted shares under the ESOP.
At the time of allotment of shares on the exercise date, the difference between fair market value of the shares as on exercise date and the amount that employee have paid for the exercise or subscription to the shares is calculated and taxed accordingly. This taxable value is called Perquisite value. This difference calculated is eligible for TDS deduction by the company and forms part of salary of the employee which is shown in Form 16 and Form 12BA of the employee.
When employee opts to sell the shares previously allotted under the ESOP, profits made by him are taxed as capital gains earned during the year. These Capital Gains are calculated by subtracting the fair market value as on the exercise date from the sales consideration of such shares.
So, when you opt to sell the shares previously allotted under the ESOP, profits made by you are taxed as capital gains earned during the year.
These Capital Gains are calculated by subtracting the fair market value as on the exercise date from the sales consideration of such shares.
The Itr requires details of the shares purchased during the year. Since the stock are still not vested in you, you cannot be said that you are holding shares of an unlisted company.
once the shares are vested in you, you can specify these details in your return.
In case you transfer the shares then this will be taxable in your hands as salary. In my view your are not required to disclose this details.
This is are my personal views and there in no guidelines available in this. Thou there is no harm to report this transaction in return if you wish.
Hello Sir,
ESOPs are taxed at 2 instances –
At the time of exercise – as a perquisite. When the employee has exercised the option, basically agreed to buy; the difference between the FMV (on exercise date) and exercise price is taxed as perquisite. The employer deducts TDS on this perquisite. This amount is shown in the employee’s Form 16 and included as part of total income from salary in the tax return.
At the time of sale by employee – as a capital gain. The employee may choose to sell the shares once these are bought by him. If the employee sells these shares, another tax event happens. The difference between sale price and FMV on the exercise date is taxed as capital gains.
Based on above, please find below the responses:
1.The stocks allotment based on the performance and not an investment needs not to be declared in ITR.
2. Without exercise the option, it can not be treated as investment.
Hello,
You are required to declare in the ITR the stocks that have been vested in your name.
If at the end of employment with the company, the company enters into an option transfer agreement with the employee, transferring Esops held by the employee(vested but not exercised) to the company, then it would be liable for capital gain. In a situation where Esops are not exercised at all but are transferred, the gains are not taxable as a perquisite in the hands of the employee, but as capital gains.
I hope this answer satisfies your requirement.
Regards,
CA Hunny Badlani
No required to declare the stocks that are not been exercised by you.
As mentioned, it would be taxed as capital gains.