Mint Explainer: The budget, buybacks, and Esop taxation

livemint.com:

Mint explains: Employee stock options are taxed in multiple tranches. First, these are taxed when an employee exercises the options and later when the shares are sold. When a company allots options, these need to ‘vest’, or become eligible to be transferred to the employee as shares, over a period of time.

The employees then need to “exercise" the options; meaning, they need to exercise the right to secure the company’s shares at a pre-determined price. At this point, the options become the shares of the company. The differential between the fair market value of the shares and the “exercise" price is taxed as a perquisite in the hands of the employee, forming part of their salary and taxable at the applicable rate of tax.

The next time Esops are taxed is when an employee sells their shares to an investor in the company or in the public market, (if a company gets listed on the stock exchanges). “The differential between the sale price of the shares and the fair market value on the date of exercise of options is taxed as capital gains, i.e., either short-term capital gains or long-term capital gains, based on the period of holding of shares, which has to be reckoned from the date of allotment of shares," said Ritesh Kumar, partner at BDO India, a tax and business advisory. Several startups have undertaken buybacks, mostly in the form of a secondary purchase of Esop shares through an incoming investor.

For instance, Swiggy announced its fifth buyback last month, in which an investor would acquire a part of its employees’ shares. Urban Company, in May, undertook a buyback through an incoming investor, Dharna Capital. In November, Flipkart made a one-time payout to its employees against their options after PhonePe was carved