Has your employer made available stock benefit schemes such as Employees Stock Option Plan(ESOP), Employees Stock Purchase Plan (ESPP), Restricted Stock Units (RSU) to you? In that case, it may interest you to know that there are some recent amendments in the taxation rules, which will henceforth determine the tax payable by you for enjoying these benefits.
Taxation of stock benefits upto March 31 2009
The benefits arising to you due to allotment or transfer of stocks (anytime between 1st April, 2007 and 31st March, 2009) were subject to Fringe Benefits Tax (FBT). The Fair Market Value (FMV) at the time of vesting minus the amount paid by you was considered a fringe benefit. The company was responsible to pay FBT (though it could be recovered from you). On the sale of the shares, the sale value minus the FMV was considered the capital gain.
The new rules [Rule 3(8) of the Income Tax Rules] were notified in December 2009, with retrospective effect from April1, 2009.
Incidence of taxability under new rules
Exercise of ESOP or vesting of RSU or allotment under ESPP will now trigger taxation in your hands as a ?perquisite?. Separately, you will also be subject to capital gains tax when you sell the underlying shares/units etc.
Valuation of the perk
The value of perquisite would be the Fair Market Value (FMV) of the share as on the date of exercise or allotment or transfer (as the case may be) minus the grant price.
For e.g. your company grants you a stock option for 100 shares at Rs. 200 each (grant price), and those shares become exercisable (vest) after one year. You exercise the stock options after one year when the FMV is Rs. 270. The value of the perquisite is Rs. (270-200)*100=Rs. 7,000.
The mode of arriving at FMV has also been notified by the tax authorities. For the shares that are listed on a ?recognised stock exchange?, the FMV shall be the average of opening and closing price of the share as on the date of exercise. It is clarified that a recognised stock exchange means a stock exchange (SE) in India which is recognised by the Central Government. NSE and BSE are recognised SEs for this purpose.
For the shares that are not listed on recognised SEs, the FMV shall be determined by the merchant banker. The merchant banker can use various methods to arrive at the most appropriate FMV. The price quoted on the overseas stock exchanges is one among them.
Once FMV for a particular date is determined by the merchant banker, that FMV can be used for all the shares that are exercised (or allotted or transferred) on that date or any day up to 180 days from that date.
Stock benefits provided by foreign companies
One needs to arrive at the perquisite value in the foreign currency itself and then convert it into Indian currency as on the date of exercise by applying telegraphic transfer buying rate as notified by SBI on that date.
Companies that are providing stock benefits that are not listed on the recognised SEs have to deduct taxes on the basis of the FMV provided by the merchant banker. Though the provisions are with effect from April 1 2009, as the rules were notified only in December 2009 , there would be certain practical issues arising, such as:
Whether the companies need to immediately deduct taxes arising on such perquisites in only one month or whether it could be spread over till the end of this financial year.
Whether companies could offset the FBT amounts recovered from the employees against the tax liability arising on salary and perquisites.
The Government should allow companies to spread the additional taxes arising on stock schemes till the end of the financial year 2009-10 and deduct accordingly. Similarly, they should also allow them to apply the FBT amount recovered from employees to TDS if it has not been repaid to employees as yet.
The whole idea of companies providing stock benefit schemes is to retain and award the employees for their commitment and dedication. However, it seems that the recent amendments have just shifted the tax burden back to employees without providing them with any form of tax break on such stock benefit schemes. This could result in a much lesser reward than that intended.
The author is with PricewaterhouseCoopers