The taxable value of perquisite in respect of “sweat equity shares” or ESOP

Updated: As per amended finance act 2020

Sweat Equity Shares are Shares or Specified Securities issued at discount or for consideration other than cash to employees or directors of the company as reward their hard work or for their value addition in the progress of the company. ESOP (employee stock ownership plan) scheme comes with the option to buy a certain number of shares in the company at a fixed price in the future. Section 17(2)(vi)  read with Rule 3(8)/3(9)  provides that the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee shall be treated as prerequisite. Effective from April 1, 2009, the perquisite in respect of “sweat equity shares” or ESOP is chargeable to tax in the hands of concerned employees. The taxable value of perquisite in respect of “sweat equity shares” or ESOP are calculated on the basis of Fair Market value of shares or securities on the date of exercise of the option by the assessee less amount recovered from the employee. The Fair Market Value shall be determined as follows:

a)  In the case of listed Shares: Average of opening and closing price as on date of exercise of the option (Subject to certain conditions and circumstances)

b) In case of unlisted shares/ security other than equity shares: Value determined by a Merchant Banker as on date of exercise of the option or an earlier date, not being a date which is more than 180 days earlier than the date of exercise of the option.

Note:

The Finance Act, 2020 has deferred the taxation of perquisite in case of start-ups from date of allotment to the earliest of the following three dates:

1. Expiry of 48 months from the end of the relevant assessment year;

2. Sale of such shares by the employees;

3. Date on which employee ceases to be employee of the start-up.

The eligible start-up shall accordingly, be required to deposit tax with the government within 14 days of the happening of any of the above events (whichever is earlier). However, 17(2) (vi) has not been amended, thus the income shall be computed in the year in which shares are allotted but tax shall be paid in subsequent year.

Source: Income tax department

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