Executive Compensation Alert: 2009 Update on Stock Options in India

If the employment agreement expressly states that the grant of equity compensation is entirely within the employer's discretion, or makes no mention of equity compensation being part of the employee's pay, then it is unlikely that an employee can claim any special or ongoing entitlement to additional equity compensation although there is no harm in expressly stating this in the stock option agreement. Get done in 7 mins. Any taxable income that has been acquired from the trading of Futures and Options after any deductions have taken place is taxed as per prescribed income tax slab rates. For more information on this, or related matters, you may wish to contact any attorney in the Executive Compensation and Employee Benefits Group:. How much tax am I meant to pay?

Employee Stock Option Plan(ESOP) Taxation In India. Check Benefits, Tips and Know What is ESOP & Its Tax implications Disadvantages of ESOPs.

What is an ESOP?

An ESPP provides the employees an option to purchase company shares often at a discount on FMV fair market value at grant or on exercise.

The plan term determines the date and price at which the employee is entitled to purchase company stock. When the employee fulfills the vesting conditions, he is paid cash equivalent to the net gain i. The employee is considered to be the owner of the shares from the date of award, along with an entitlement to receive dividends and the voting rights. The forfeiture conditions may be based on continued service over a specified period of time.

The employee may be required to pay for RSA at grant which may be at a discount or more. It is usually awarded the stock at no cost.

Under RSU, an employee is awarded an entitlement to receive stock at some specified date in the future, subject to certain conditions. These conditions may relate to performance or tenure of employment. Until shares are actually delivered, the employee is not a shareholder and does not have voting rights or rights to receive dividends. RSU is not an immediate transfer of shares,subject to forfeiture, but a promise to give shares in the future.

RSUs are generally entitled to quasi-dividends. Notwithstanding anything contained in the Section 79, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:. Where the consideration is non-cash, on the basis of a valuation report from registered valuer, such non-cash consideration shall be treated in the following manner in the books of accounts of the company:.

In case the above clause is not applicable, it shall be expensed off as provided in the accounting standards. In respect of sweat equity shares issued during an accounting period, the accounting value of the shares shall be treated as a form of compensation to the employee or the director in the financial statements of the company. These guidelines govern the legal requirements and accounting practices to be followed under ESOPs. Though a Guidance Note was issued by ICAI in the year , as per the professional ethics requirement of the ICAI, the requirements of the guidance note are not mandatory for compliance, and such a note only indicate guidance on any accounting matter to the preparers and auditors of the financial statement.

As such, in practice, the Indian Companies rarely follow the requirements given under the Guidance Note. Under such circumstances, the guidelines issued by SEBI in act as the source of regulation, which are —. SEBI Guidelines went under Amendment in the year and and now the amended guidelines provide for a detailed disclosure of stock option compensation expenses computed by applying fair value method and also the impact of non-recognition of fair value compensation cost on basic and diluted EPS.

There was a proposal to replace the ESOP Guidelines with a set of regulations in order to ensure better enforce ability, to provide for a regulatory framework for all kinds of employee benefit schemes, involving securities of the company- to address the concerns raised with reference to composition of employee welfare trusts, disclosures, etc.

The provisions of the new regulations are applicable to every listed Company in India which has schemes for the following purposes:. Further, several new definitions and amendments have been added —. A company is free to implement scheme either directly or by the way of setting up an irrevocable trust. Also, the total number of shares under secondary acquisition held by the trust shall be within the following prescribed limits:.

Until the financial year-ending March , there were no specific guidelines for taxing the benefits arising from ESOPs. The ESOPs were usually taxed as a perquisite in the hands of the employees on the difference between the FMV of the stock on the date of vesting of the options and the exercise price.

The taxation is initiated only at the time of sale of the shares for such qualified ESOPs. The employer was free to recover such FBT from the employees. Currently, ESOPs benefits are taxable as perquisite and are included in the salary of the employees as a part of it. The employer is required to withhold tax at source in respect of such perquisite. The value of the perquisite is computed as the difference between the FMV of the share on the date of exercise and the exercise price.

The employer is also required to deduct the TDS in respect of such perquisite. The incremental gain i. This means than any profits gleaned from such trading would be taxed in the same manner as income or profits acquired from the carrying on of any other kind of business. Therefore the taxpayer can claim deductions on tax for any expenses he may have incurred while trading in Futures and Options such as telephone bills, electricity bills, internet bills etc.

Should any income or profits arising from the trading of Futures and Options be treated as business income then the following ramifications come into play:. Should any income or profits arising from the trading of Futures and Options be treated as capital gains then the following ramifications come into play:.

In order to determine the total turnover derived from the trading of Futures and Options, it is necessary to take into consideration the following factors:. It is important to determine turnover in order to conduct tax audit on the final amount as per Section 44AB of the Income Tax Act, Tax audits, however, are only applicable in instances where the total turnover determined over the course of a fiscal year is more than Rs 1 crore.

Mr Patel is a Futures and Options trader and has incurred a profit and loss from the following transactions:. Therefore, based on the transactions outlined above, the total turnover can be calculated as follows:. Any loss that has been incurred from the trading of Futures and Options is treated in the following manner:.

Any income or profit arising from the trade of Futures and Options in the market is to be treated in the following way for the purpose of a tax audit:. Taxpayers who regularly carry out transactions with regards to Futures and Options trading are permitted to claim tax deductions on the following expenses, since these can be deemed to be expenses arising from the conducting of business:.

Benefits Under Section 43(5):

Getting ESOP as salary package? Know about ESOP Taxation. Employee Stock Option Plan. Updated on Jul 20, FAQs on tax on employee stock options – + CAs & tax experts & + businesses across India. Efiling Income Tax Returns(ITR) is made easy with ClearTax platform. Just upload your form 16, claim your deductions and get. I am an Indian citizen working in india, received stock options from US company. I filed W-8BEN but still tax was deducted on vesting of stocks. ESOPs are Employee Stock Option Plans - few call them Employee Stock Ownership Plans in India. Check Benefits, Tips, Taxation & download Calculator.