There are more important things for the Senior Management to worry about than personal tax and investments. Hence the senior management has a person to do the worrying for them. However there isn’t any harm in knowing how the cheque books balance. Here are few pointers for that senior manager to get rid of your tax problems and set your mind on bigger and more important things.
Under an Esop, top-performing employees are eligible to purchase a pre-determined number of shares (option granted) in the company at a pre-determined price (also called the exercise price). This is usually at a discount to the market price. Once this option vests with the employees, their decision to buy (or not) such shares has to be conveyed during the vesting period (generally a year or two). After the vesting period, the shares can be bought at the exercise price. At that time, an employee may sell the stock or hold on to it in hopes of further price appreciation. In some cases, companies provide for a specified lock-in period, during which the shares cannot be sold.Tax implications
The taxation laws of Esops has gone through several changes in the past few years. During the draconian FBT regime, an employer was required to pay a fringe-benefit tax on the benefit derived by employees from Esops, which in turn could be recovered from employees. At present, benefits derived from Esops are taxed as perquisites and form part of salary income. The perquisite value is computed as the difference between the Fair Market Value (FMV) of the share on the date of exercise and the exercise price. There are specific valuation rules prescribed for listed and unlisted companies in order to determine the FMV. An employer is required to deduct tax (TDS) in respect of any tax liability arising from perquisites.Personal taxes
In addition, the difference between the sale consideration of the shares and the FMV on the date of exercise (as referred above) is chargeable to tax under the head capital gains in the hands of an employee. In order to compute capital gains, the FMV on the date of exercise becomes the cost of acquiring such shares. Depending on whether they have been held for 12 months or more from the date of exercise, capital gains will qualify as long term or short term. Further, if the shares are sold on a recognised stock exchange in India, the long-term capital gains will be exempt and the short-term capital gains will be subject to the preferential rate of taxes at 15 per cent. Most employees allotted Esops sell the shares immediately to enjoy the gains and regard this money as a part of a bonus. Consequently, this money is spent on luxury holidays, cars or more productive matters such as pre-paying large home loan balances. After having utilised the money gained from Esops, employees forget the potential tax liability arising out of the capital gains. They are then in for a rude shock when they come face-to-face with the truth during tax-filing season.The tax soup!
In Kumar's case above, since the Esops were sold immediately on exercise, he had earned short-term capital gains. Again, as the shares were sold on a foreign stock exchange, they were not eligible for preferential tax rates. In other words, Kumar was now liable to pay short-term capital gains tax on the entire capital gains of Rs 3 lakh at the slab rates applicable, which turned out to be the highest slab rate, before he could file his tax returns in July this year. To add to his woes, the high amount of taxes (approximately Rs 90,000) that he was now liable for, also attracted interest under various sections of the Income-Tax Act for non-payment of advance-tax installments during the previous year 2012-13. His total tax liability, including tax and interest amounted to a whopping Rs 105,000 that was due to be paid by the end of July 2013. Kumar was dumb-struck with these calculations and left feeling that the whole Esop thing did not really benefit him in the way he had perceived it. Much like him, other employees cash in on Esops by selling them in the stock market. They seem to be content with the TDS by an employer and forget the capital-gains liability. Even with the preferential short-term capital-gains tax rate, the liability works out to quite a sum if left till the year-end. All employees who cashed in on Esops since April this year can work out their potential capital-gains liability and discharge a part of it through the first advance-tax installment due by September, 15. Of course, holding on to the shares for more than 12 months after the date of exercise and then selling it on recognised Indian stock exchanges can help an employee avoid capital gains totally.OPTIMISE RETURNS FROM ESOPS
* Hold the shares for more than one year to avoid long-term capital gains tax * Sell on a recognised stock exchange in India * If shares are sold in less than one year, pay short term capital gains tax
When any Capital asset such as land, house, car, jewelry and shares etc. are sold, then any profit on such sale is considered Capital gains. In this head all the assets are categorized into two types
- Shares and
- Other than Shares.
When Shares are held for more than 12 months and sold, they are considered long term, profits from such sale are exempt from tax. When held for less than 12 months then profits on sale of such are taxable at a rate of 15%.
In case of Assets other than shares, if held for more than 36 months they are considered long term. The gains from such sale are taxed at a rate of 20%. In case of such assets held for lesser than 36 months, the gains from such sale are taken along with other heads of income and taxed as per the slab.
Claiming Exemptions on Capital Gains
- If A Residential House Sold and within 3 years another residential house is constructed or purchased. Capital Gains up to Value of New House is Exempt
- If within 3 years of sale of old house, RECL Bonds or NHAI bonds are purchased, the gains up to amount of Bonds purchased shall be exempt (limited to Rs.50 Lakhs per transaction)