BUDGET 2009
Changes in the ESOP Taxation
- Existing Provisions:
The grant of options under the Employee Stock Option is considered as a Fringe Benefit. Accordingly on exercise of the benefit arising consequent to the grant of Esops. The value of the taxable fringe benefits is defined to mean the excess of the fair market value of the underlying shares on the date of vesting of the options less the grant price of the options. The FBT is payable at the rate of 30% plus applicable surcharge and cess. The company has been permitted to recover the fringe benefit tax so paid from the concerned employees. The employees are not liable to be taxed in respect of options liable for FBT. In the hands of the employees, the fair market value which has been considered for the payment of the FBT, would be considered as cost for the payment of subsequent capital gains at the time of sale.
- Proposed Amendments:
One of the big ticket announcements of the Budget 2009 has been proposed abolition of the FBT. Consequent to the proposed abolition of FBT provisions, the taxation of ESOPs is also proposed to be amended as under:
- The FBT payable on the exercise of the options has been abolished.
- The ESOP benefit will now be taxed in the hands of the employee as a perquisite rather than FBT for the company. Section 17(2)(vi) is proposed to be amended to provide that the value of any benefit arising to an employee as a result of the transfer or allotment of a security at a price lower than the fair market value of such security shall be liable to be taxed as a perquisite in the hands of the employee.
- It is also provided that a security shall mean and include the share allotted or transferred under an employee stock option plan or as sweat equity shares.
- Previously, the value of any fringe benefit was computed as the fair market value of the security on the date of vesting of the option as reduced by the amount actually paid by, or recovered from the assessee in respect of such security or shares.
- It is proposed to substitute the said sub-clause to provide that the value of perquisite will be determined by reducing from the fair market value of the specified security on the date of exercise of such option, the amount actually paid by, or recovered from the employee. In simpler terms:
Value of perquisite= A-B; Where A= the Fair Market Value (FMV) of the shares on the date of exercise of the option; B= Grant/Exercise price - The government will prescribe the rules for the determination of the fair market value as on the date of exercise of the options.
- Tax is payable on the date on which shares are allotted or transferred to the employee. The perquisite value of the ESOP will be added as part of total income of the employee and tax would be payable thereon as per his applicable slab rates.
- The employer company will be liable for deduction of tax n such perquisite value in addition to normal TDS on the salary payable to the employee.
- The above provision could result in a higher/lower tax burden for the employees depending on the nature of change in FMV between date of vesting and exercise.
- A corresponding provision is introduced in section 49 of the Income-tax Act, sub-section (2AA) to provide that for the purpose of capital gains taxability, the cost of acquisition of the shares will now be the value considered for valuation of the perquisite i.e. the underlying fair market value as on the date of exercise of the Option.
- In cases where the FBT has been levied (in the past) the cost of the acquisition of the shares will be fair market value considered for the purpose of FBT.
- The amendments are proposed to be inserted with effect from A Y 2010-11 effective for the financial year 2009-10.
- In cases where the FBT is levied during the current financial year, there would be some complications since the FBT so paid is no longer payable and the perquisite will be taxable. This needs to be suitably clarified.