ESOP / RSU Tax: What is ESOP Tax, Implication on Listed and Unlisted Shares

ESOP or RSU as a way of offering competitive packages to employees is gaining momentum in India. ESOPs or RSU allow the employees to have a shareholding interest and help organisations foster a sense of loyalty and commitment since the employees become the owners of the business. This in turn, potentially adds up to profit generating capacity, thereby increasing the competitiveness of the company. There is a tax implication of holding ESOP or RSU for a company which is governed under Income Tax, 1961. Further, the complexity increases in case you hold ESOP or RSU for a global company like Microsoft, Amazon, Google, etc. Bizfoc is a leading ESOP or RSU tax consultant in India who will guide you on the tax implications of holding or selling ESOP or RSU.

What is ESOP OR RSU Tax

ESOP or RSU complement the salary component of the packages offered to the employees and hence allow the employees to increase their earning potential. As this increase in the earning is not a salary income for the employee but rather capital gains in stocks, these gains are not taxed like the normal salary an employee receives from the company's payroll. Tax liability of RSU or ESOP depends on the date of exercise, exercise price, time period for which RSU or ESOP was held and fair value of RSU or ESOP. Although the gains made by the employees are purely capital gains, the company still bears an expense of offering the employees these options free of cost rather than selling these options in the market. Therefore, this expense also needs to be allowed for as a deduction while the company calculates its profit for the year on which it will pay tax.

Taxability of ESOP or RSU for Employee under Income Tax, 1961

Income Tax, 1961 covers the taxability of ESOP or RSU covering the gain for the ESOP or RSU to employees, these gains become taxable. Taxation for employees is divided into 2 scenarios: at the time of Exercise and at the time of Sale.

At the time of Exercise:

When the options are exercised by the employee i.e. equity shares are purchased by employees at grant price, the difference between the market price at which the stock is being traded on the stock exchange on the date of exercise and the exercise price is added as the perquisite in the salary component of the employee. This means that the tax liability of the employees will increase due to the gain earned with rise in stock price in comparison to grant price.

At the time of Sale of the equity shares:

Taxation at the time of sale again can be seen in two ways: whether the stock is listed i.e. listed on any stock exchange (Examples are BSE or NSE) or unlisted.

In case the stock is listed, the gains made by the employees over more than one year from the date of exercise will be subjected to Long-term capital gain tax of 10% (without indexation) given the stock is held for a period of more than one year from the date of exercise and gain earned on the date on which shares are sold exceeds Rs 1 lakh. Otherwise, the gains made by the employees will be subjected to Short-term capital gains tax which is 15%.

In case the stock is not listed on any stock exchange, the gains will be subjected to Long-term capital gain of 20% given the shares are held for a period of more than 24 months from the date of exercise of shares. Otherwise, the gains will be subjected to a Short-term capital gain as per the marginal rates of tax slab under which an employee comes.

In case ESOPs are not exercised by the employee, no tax liability will be incurred by the employee and the company won’t get any tax reduction.

Summary Taxation for ESOP or RSU tax for employee:

The below covers the summary taxability of ESOP or RSU for the employee:

At the time of exercise:

The difference of fair value / market value of share price less the exercise price is added to the salary of the employee.

At the time of sale:

ESOP or RSU Tax for Employer

Employers issue the ESOP or RSU to employees at a price that is lower than the market price of shares. Therefore, the ESOP or RSU options carry some cost to the employer as ESOP or RSU is offered at a discounted price to the market value. This in turn, adds up to the cost of running the company. Thus, employers can get a tax deduction on the cost of the ESOPs issued to employees in the year in which the options are exercised. This means that the companies can reduce their tax liability if employees accept the ESOPs.

Amendment for ESOP Tax in Budget 2020

According to an amendment in the budget, any employee who has exercised the option from April 1, 2020, is not required to pay tax at the time of exercising of the ESOP or RSU. Employers can defer the deduction of TDS on the difference of fair value less exercise price of share to the earlier of the following events:

• Expiry of 5 years from the year of ESOP or RSU allotment
• Date of ESOP or RSU sale by the employee
• Date of employee leaving the company

BizFoc: ESOP or RSU Tax Consultant in India

BizFoc is a leading ESOP or RSU Tax consultant in India with a team of Chartered Accountants with more than 10 years of experience. The team will guide you on the ESOP or RSU Tax implications for the holding or sale of ESOP or RSU whether the company is unlisted or listed in India or abroad. BizFoc is an ESOP consultant that provides end-to-end consultancy in the ESOP or RSU design, taxation, accounting, and corporate compliance. Get in touch with the BizFoc team for tax consultancy on the ESOP or RSU.

Conclusion

ESOP or RSU are gaining popularity in India. Many Indian companies like Zomato, Meesho, Flipkart, Nykaa, and Infosys, etc. offer ESOP or RSU to their employees. Global companies like Google, Amazon, and Microsoft also offer ESOP or RSU to their employees working in India. Holding or selling of ESOP or RSU has tax implications and needs expert tax consultancy. You can get in touch with BizFoc for calculating the tax liability on the ESOP or RSU.

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