By Sandeep Jhunjhunwala
Income-tax legal guidelines lay out provisions for taxation of notional revenue on train of worker inventory choices (ESOPs) by characterising the differential between Fair Market Value (FMV) of shares allotted on train and strike worth as perquisite. Taxation of such perquisites follows an analogous course as for taxation of different wage elements. Clarity on taxation entrance begins to show obscure when ESOPs are exercised and shares allotted, publish cessation of employer-employee relationship. Questions encompass the discharge of taxes publish termination of the employer-employee relationship.
Former employer’s TDS obligation
Definition of perquisite below I-T Act encompasses securities allotted or transferred, straight or not directly, freed from value or at concessional fee by employer or former employer. This could fasten TDS obligation on the previous employer even the place the person exercising possibility is not its worker. Though the characterisation as perquisite sounds helpful for workers, because it comes with the perks of claiming deductions towards wage revenue, this interpretation might trigger sensible difficulties for the ex- employer in discharging taxes as there may very well be no wage disbursements from which taxes may very well be withheld. Full and closing settlement may very well be a recourse, if choices are exercised previous to such disbursement. Whether that in itself can be commensurate to cowl taxes is a situational side. Else, the previous employer bears tax value on behalf of its ex-employee until the taxes paid are recovered from the worker.
Taxation as present within the fingers ofex-employee
If discharge of taxes by the previous employer proves to be burdensome, a shift in obligation onto ex-employee is required, who would then should funds further tax legal responsibility whereas computing advance taxes. Allotment of shares on train of ESOPs publish termination of employment is also construed as a present, i.e., property (shares) obtained with out consideration or for consideration lower than FMV, taxable as “other income” in fingers of the ex-employee. Again, the delta between FMV and train worth paid by the ex-employee (the place distinction is greater than Rs 50,000) would turn into the taxable base for present tax. Valuation guidelines to find out FMV, nonetheless, differ and are an element of internet e book worth of allottee firm arrived at after making use of prescribed I-T guidelines. Passing the mantle to the ex-employee has its personal set of adversities, foremost being, money move points as taxes are to be discharged on unrealised revenue on the time of receipt of shares.
The author is associate, Nangia Andersen LLP. Inputs from Amita Jivrajani & Ankur Agarwal
Source: www.financialexpress.com”