Vesting schedule determines when employee gets control over his options

Written by AN Shanbhag | Sandeep Shanbhag | Updated: May 31 2009, 05:46am hrs
There is a strong hope that FBT will be withdrawn in the forthcoming budget. If this happens and if I exercise my stock options in FY 09-10, which were vested in 2008-09 and 2007-08, will FBT be still applicable to these optionsI was wondering if I should wait for the Budget outcome. On another thought, even if I exercise the options now, its still 2009-10 but before the Budget. In such a case, will I get the FBT refunded I could have waited for the budget outcome, which is four to six weeks away, but I am due to travel abroad for a year and was contemplating having the shares in my account.


Note that getting stock options is not the same thing as getting shares of the stock. An option is the right but not the obligation to purchase the shares. You purchase the shares by exercising the options. Generally, this right to exercise is spread over a number of years. In other words, you must earn the right to purchase those shares; you need to become vested in those shares.

The vesting schedule determines when the employee gets control over his options. Once vested, the employee still has to exercise the options at the exercise price during the exercise period in order to become the owner of the shares.

Note that the vesting date does not have any influence on when the FBT becomes payable. The liability to tax will still be attracted on the date of allotment or transfer of the shares. In other words, for FBT to apply, an employee must first exercise his or her options.

In terms of your specific question, assuming FBT is discontinued in the Budget, even if your shares have been vested earlier, no tax will be payable. However, if you were to exercise today, whether you would get a refund of the FBT is open to doubt and will depend upon the nature of the change in the FBT law. There is a possibility that the amendment may be made to be applicable prospectively in which case you will not be able to claim the refund. Hence, if it is so possible, it would be advisable to wait and watch.

I had opened a savings bank account for my son when he was a minor in order to inculcate the habit of saving and create provisions for his future needs. When he became an adult, the account was converted to a joint account with me as second joint holder, payable to either or survivor. This account is still running and at any given time, has a balance of less than rupees ten thousand. My son immigrated to Australia by end December 2001. Before leaving, he tried to close his PPF A/c but was told that it would have to run for a minimum of 15 years. His PPF A/c will be completing 15 years in the following financial year, with a maturity amount of approximately Rs 7 lakh. I have now been told that it cannot be extended as he is a NRI. Please let me know:

1. Whether the maturity proceeds of his PPF A/c can be remitted to him abroad and if so, how.

2. Now that he is a NRI, does the savings bank account have to be converted to NRO even though I am the second joint holder and a resident

3. Is the interest in a NRO A/c taxable even though it is far below the taxable limit, and at what rate


An NRI cannot continue his resident savings account. He must get such account converted into NRO. Therefore, in your sons case, the savings account needs to be redesignated as NRO. You may continue to remain the second joint holder in such an account in spite of the fact that you are a resident. The interest on NRO is subject to TDS @ 30.9% if the interest is below Rs 10 lakh and @ 33.99% if it is above Rs 10 lakh. If your sons taxable Indian income including the NRO interest is less than the basic exemption limit of Rs 1.50 lakh, he need not file a tax return. However, TDS will continue to apply and the only way to get this refunded is by filing a tax return. In other words, though the tax return is not mandatory, it may be filed in case he desires the tax deducted to be refunded. Lastly, what you have been advised regarding the PPF account is correct. Moreover, the maturity proceeds may be credited to his NRO account. The same may be remitted abroad if so desired. For this purpose, the bank will require an undertaking from your son and a certificate from a chartered accountant certifying that taxes if any due on the amount to be remitted have been paid. CBDT has prescribed formats for both the undertaking and the certificate and the bank should be able to provide you with the same.

One of my friend's wife (salaried) has taken a home loan of Rs 10 lakh to purchase a house and support her brothers financially to come out of business losses (also providing them with the house during the crisis time). She is paying the installments of the home loan for the last two years. Now the brothers have recovered from their losses and able to liquidate some of their properties to repay the sister back.A. In such a scenario if she accepts moneyof around Rs 9 lakh (to close the home loan) from her brothers, will it be treated as gifts or repayment of a loan from her brothers Will it be taxableB. She also wants to give (donate) the house in one of the brother's names. Is it ok


As per Sec 56, any sum of money received as a gift from a relative is tax-free without any limit. A brother is a relative of the sister as per the definition of the term relative and hence if the sister accepts Rs 9 lakh from her brothers, the same would be tax-free in her hands.

Gift tax has been discontinued with effect from 1.10.98. Sec 56 is limited to gifting sums of money. Even under that section, as mentioned above, gifts between relatives are tax-free. Therefore, if she were to gift the house to one of her brothers, the transaction would be tax-free.

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