The Hindu Business Line : Sale of ESOP and gift shares

I WORK for a private limited company, which has granted employee stock options. A foreign company, however, plans to acquire the company. At this stage, the employee stock options granted to us have vested in us and we exercised the option in September 2004. The shares allotted to us under the employees stock option plan (ESOP) are held by us in dematerialised form. Our employer company has also gifted to some of its employees shares free of cost, which are also held by us in dematerialised form. The company is now to be taken over by a foreign company and we will have to sell the shares which are held by us and which were allotted to us as employee stock options and by way of gift to the persons who propose to acquire this company. What will be the tax implications of the shares allotted to us under the employees stock option and the shares allotted to us as a gift, both at the time of allotment and at the time of sale?

Kishore

Reply

Insofar as the shares allotted to you through the employee stock option is concerned, the same will not be treated as a perquisite and taxed under the head salaries if the scheme under which the allotment was made satisfies the conditions stipulated in Notification No. SO 1021(E) of October 11, 2001. When these shares are sold, the capital gains will be computed by taking the price at which the employee stock options were allotted as the cost of acquisition.

As it appears that the shares would have been held by you for less than 12 months, the gain arising on its sale will be a short-term capital gain and subject to the normal rates of tax applicable to an individual. If the conditions stipulated in the notification are not satisfied, the difference between the market value and the price at which the shares have been allotted to you under the employees stock option scheme will be treated as a perquisite and charged to tax under the head "salaries". Since the employer company is a private limited company the market price will have to be normally determined on the basis of the yield method. On the sale of these shares, the capital gains will be computed by taking such market value to be the cost of acquisition. Such gain will also be a short-term capital gain.

As regards the shares allotted to you as a gift, the taxability will be in the same manner as it would be in case of shares allotted under the employees stock option plan, where the conditions in the notification are not satisfied, except that in computing the value of perquisite the entire market value will be taken as the perquisite since there would have been no price paid by you to acquire the shares.

Mail your queries to taxtalk@thehindu.co.in or by post to Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.

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