Paying tax on ESOPs? Check your CTC

Is your company using your cost to company, CTC, to make you pay the fringe benefit tax, FBT, on your stock options, ESOPs?

How much capital gains tax do you have to pay on your ESOPs after selling them? If you are working in a company outside India and gains from ESOPs is credited in your bank in India then how much tax do you need to pay?

Will the recent Supreme Court judgement related to ESOPs of Infosys help you in any way?

In a chat with readers on January 9, Get Ahead tax expert Mahesh Padmanabhan answered these and many more queries related to ESOPs?

For those of you who missed the chat, here is the transcript.

sridhar asked, Does this mean that ESOP, do we need to pay any tax? I have some stocks allocated by company and now I was asked to pay the 30% tax?

Mahesh Padmanabhan answers, ESOP is currently covered under the fringe benefit tax and theoretically FBT is payable by the company. However, most companies work on the concept of Cost To Company (or CTC as is popularly known) and accordingly might get the employees to foot the tax bill. 

Ajaibir asked, I have shown intent to purchase ESOP of a company which I have left and is not listed. However, I have opted for vested OPTIONS. How much tax I have to pay now or later as per latest Govt ruling?

Mahesh Padmanabhan answers, ESOP is now covered under the FBT and accordingly the company has to pay FBT on the same. The valuation rules were notified recently on 23/10/2007 and accordingly the valuation is done on the date of vesting of the options. You would however, be needed to pay the capital gains tax if the ESOP results in short term capital gains at 10% (base rate).

temp asked, I work at an MNC in Bangalore (listed in US), do I need to pay taxes on ESOP profits in india?

Mahesh Padmanabhan answers, Do you mean the gains on selling such ESOPs, then yes you are supposed to pay tax as applicable.

manish asked,  Good Afternoon Mr. Padmanabhan i had allready paid the tax that was called as FBT for my ESOP as this decison has come. can i get back my tax which i had paid to my company i paid tax on 23/12/07?

Mahesh Padmanabhan answers, As i had mentioned earlier to another query, companies might build in the FBT element into the ctc and might require the employee to pay the same. If this is the case then you would not be eligible to get back any refund.

Niraj asked,  am having one question related to ESOP. I am working for an IT company head quatered in US, which has given me shares as part ESOP . It was granted to me in Aug 2004 @10$/share and as per company's rule, 25% of granted share was vested in Aug 2005. Pls. remember when share was granted to me or vetsed, I didn't purchase them. I sold those vested share in Dec. 2007 @17$ and I got the difference of granted price and selling price (i.e.7$/share) * no. of shares and company got the granted price (i.e. 10$) * no of shares. These shares are listed in NASDAQ USA and it was sold there and I got the rupees credited into my account in India. I would like to know 1. If it will treated as long term capital gain or short term capital gain? 2. How much tax, do I need to pay due to the capital gain?

Mahesh Padmanabhan answers, This would take a lengthy explanation and accordingly pls write in separately at mahesh@relaxwithtax.com.

Nash asked, I am selling ESOP of a US Company that I worked for, I held these shares for more than 3 yrs, I will be getting $ check, what is that tax % that I need to pay?

Mahesh Padmanabhan answers, long term capital gain tax in your case would be 20% (base rate), applicable on the capital gains portion.

suresh_usha asked, dear mr Padmanabhan the issue of taxation would arise only at the time of disinvesting the stocks before the 3 year holding period. but by the the supreme court's verdict investing in esop's would be a good tax planning device. am i correct?

Mahesh Padmanabhan answers, The current position is that on vesting of ESOP's to the employees, the employer has to pay FBT based on the valuation rules prescribed in the notification issued on 23/10/2007. The employee might be liable to pay capital gains tax in case the vested shares are sold within 12 months of holding i.e. if it is short term.

Arijit asked, I have bought some shares under ESOP scheme. But company is deducting tax @33% on the allotted amount from my salary. Shall this amount be revoked after the recent SC judgement?

Mahesh Padmanabhan answers, The supreme court judgement is applicable to the case of infosys esops that were issued prior to 2000. The laws have been modified now and accordingly ESOPs are covered under the fbt regime. The employer might load the fbt onto the employee.

Part II: Tomorrow

Mahesh Padmanabhan is principal advisor -- direct taxes group, RelaxWithTax Consultants Pvt Ltd, a Mumbai-based personal taxation and finance solutions provider.