Change in taxability of equity awards

The Income-tax Act has been amended to remove the provisions of the Fringe Benefit Tax (FBT), which was introduced in 2007. Because of this, there will be a change in the taxation of equity awards by COMPANY X [including Employee Stock Option Plan (ESOP), Employee Share Ownership Plan (SOP)), Restricted Stock Units (RSU) and Performance Based Restricted Units (PRU)].

Given below is a brief note on the taxation of equity awards granted to employees under the pre, during and post FBT regime. This mail is intended as a heads up for all participants in the above mentioned programs in India. We will share further information and process details as and when the relevant rules are notified by the Government of India.

Please note that the below relates only to FBT on equity awards and not on FBT on any other benefits like car scheme.

Pre FBT regime
· Benefit provided by COMPANY X to its employees in the form of equity awards was exempt from being treated as a perquisite in the hands of the employee.
· Gains/losses on transfer of such shares by the employee were subject to tax as capital gains. Capital gains was the difference between sale proceeds realized on sale of such shares by the employee and the price paid by the employee for the same (grant/release/allotment price), as applicable.
· The responsibility of offering capital gains to tax and remitting the taxes due under such COMPANY X equity awards was on the employee
FBT regime

· With effect from 1 April 2007, the benefit given by way of equity awards was brought to tax under the FBT net.
· FBT was payable when the shares were allotted or options exercised or units released. The value of fringe benefit was the fair market value of the shares on the date on which the shares were allotted, option vested or units released as reduced by the amount actually paid/recovered from the employee (E.g. grant price).
· Capital gains was payable on the difference between the proceeds received by the employee and the Fair Market Value considered for the purpose of FBT.
· The responsibility of offering capital gains to tax and remitting the taxes due under such COMPANY X equity awards was on the employee


Current – Post FBT abolition regime

· Fringe Benefit Tax (FBT), on all items including equity awards, has been abolished w.e.f. 1 April 2009.
· Benefits given by way of equity awards will now be taxed as a perquisite in the hands of the employee. Tax will be withheld (TDS) from the employee along with other compensation payouts. The value that will be subject to TDS would be the difference between the Fair Market Value of the shares on the date of allotment/exercise/release and the grant price for the same.
· Capital gains is payable on the difference between the proceeds received by the employee and the Fair Market Value considered for the purpose of calculating TDS for SOP, RSUs & PRUs. Capital gains will not be applicable on stock options since it is a cashless transaction.
· The clarification on how Fair Market Value is to be arrived at is awaited.