ESOP taxation relief in Budget 2024: Govt may consider deferring tax to point of sale
While the possibility of benefitting from increasing share prices is a motivating factor for employees, the present Income-tax mechanism is a dampener.
Taxability of ESOPs
As per present Income-tax provisions, taxability of ESOPs occurs at two stages. Firstly, at the time of allotment of shares and thereafter, at the time of sale of the shares. When employees exercise the options granted to them, they are allotted shares upon payment of an exercise price. The benefit arising from allotment of shares is taxable as perquisite in the hands of the employees. The value of perquisite will be the difference between (i) Fair Market Value (“FMV”) of the shares determined as provided in the Income-tax law and (ii) exercise price. The employer is required to withhold taxes on such perquisite and remit the same within timelines as applicable for salaries.
Thereafter, when employees sell the shares, gains from such sale is taxable as capital gains in the hands of the employees. The taxable capital gains will be the difference between (i) sale consideration and (ii) FMV of the shares used to determine the taxable perquisite at the time of allotment. The taxes on such capital gains are required to be remitted by the respective employees/ individuals.
Hardship to taxpayers in relation to taxation at the time of allotment of shares
Hardship to the taxpayers arise in relation to the taxation at the time of allotment of the shares.
While there is no cash inflow to the employees at this stage, the employees have to pay the
