Section I: Income Tax and Your Career

• Ques: All about employee stock options
• Ans: Key points:
  • Stock Option means a right but not an obligation granted to an employee to apply for the company stock (shares) at a predetermined price. The scheme is generally called "Employee Stock Option Plan (ESOP)".
  • Your employer is liable to pay Fringe Benefit Tax (FBT) in respect of the fringe benefits provided or deemed to have been provided by it to its employees, directly or indirectly during the previous year. From this year, grant of stock options by employers to employees has been brought within the purview of FBT.
  • Many employers plan to recover the FBT on ESOPs from the employees.
  • The value of fringe benefit is determined in accordance with the formula:
    A - B, where,
    A = the Fair Market Value (FMV) of the shares on the date of vesting of the option; and
    B = the amount, if any, actually paid by, or recovered from the employee
  • The below illustration has been provided by Income Tax Department to understand stock options:
    • A company "X" grants option to its employee "R" on 1st April, 2004 to apply for 100 shares of the company at a predetermined price of Rs. 50/- per share with date of vesting of the option being 1st April, 2006 and exercise period being 1st April, 2006 to 31st March, 2010.
    • Employee "R" exercises his option on 31st March, 2007 and shares are allotted/transferred to him on 3rd April, 2007. On 25th October, 2007 these shares are sold for Rs. 200 each. On the date of vesting of the option, fair market value of the share was Rs. 80 per share.
  • The tax implication of above situation will be as under:
    • Since shares are allotted or transferred on or after 1st April, 2007, provisions of fringe benefit tax are attracted. Fringe benefit with respect to employee "R" is (Rs. 80 - Rs. 50) X 100 = Rs. 3,000
    • Company "X" will pay fringe benefit tax on Rs. 3,000
    • Cost of acquisition in the hand of employee "R" = Rs. 80 per share.
    • Capital gain = (Rs.200 - Rs. 80) X 100 = Rs. 12,000
    • Period of holding = 3rd April, 2007 to 25th October, 2007 i.e., less than 12 months. Hence, the amount of RS. 12,000 will be charged to short term capital gain.