Opinion Of Eminent Legal Luminaries On Controversial Issues

Are ESOPs Received By An Employee Taxable?

QUERY: Whether shares received in ESOP from the employer would be taxable under section 17(2)(vi) of the Income-tax Act, 1961 as a perquisites or under section 56(2)(vii) of the Act as a gift or under both the sections?
ANSWER: Generally the ESOP is received by the employee from the employer for the services rendered by him in the past and as a recognition of his contribution to the organization. Thus, it is necessary to have employer and employee relationship. Once that relationship exists then the employee is entitle to receive ESOP from present employer or past employer and therefore the same will be taxed under the head ‘Salaries’ and it would be included as perquisite under section 17(2)(vi) of the Act.

Therefore, the same would not be included as a gift from the employer under section 56(2)(vii) of the Act, for the following reasons.

S. 56(1) reads as under:

“Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ‘Income from other sources’, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.”

Thus ESOP is chargeable under the head salaries - item A of section 14, hence, the same cannot be charged under section 56 of the Act, so there is no question of double taxation.

Further ESOP is given for consideration and therefore same cannot be taxed under section 56 of the Act on the basis of decision of the Mumbai Tribunal in Chandrakant H. Shah vs. ITO [28 SOT 315]. In that case the question was whether a loan transaction is covered by section 56(2) of the Act. The Hon’ble Tribunal observed that from the perusal of the Finance Minister’s speech it is clear that section 56(2)(v) has been brought on the statute of fill up the vacuum created by abolition of the Gift Tax Act, 1958 in the year 1997. Furthermore the Hon’ble Tribunal has also observed that in section 56(2)(v) the term ‘consideration’ is neither be fixed by the word ‘adequate’ nor it is suffix by the word ‘money’ or ‘moneys’ worth. Hence, if any transaction there exists consideration as further provisions of Indian Contract Act, 1872, such transactions would not come into the ambit of this section. Under the provisions of Indian Contract Act, 1872 a person can make a proposal to the other for his acceptance and when such proposal is accepted such proposal becomes a promise. The person making the proposal is called a ‘promisor’ and the person accepting the proposal is called a ‘promisee’ therefore, it was a transaction having consideration and the same would not fall within the ambit of provisions of section 56(2)(v).

Similarly, ESOP falls under section 17(2) and not under section 56(2)(vii) of the Act.
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One comment on “Are ESOPs Received By An Employee Taxable?
  1. Vickram says:

    Thank you Motiwalla.
    I have one concern. My company granted me ESOP of 350 shares and I have exercised at INR 480 (market price) at a value of INR 30. I have paid 2 cheques.

    1. INR 30 x 350 No. of Shares = INR 10500
    2. Perq Tax i.e., INR 48667.5

    INR 350 x 480 Market Price = INR 168000
    Calc. for Perq Tax FMW – Alloted Price (INR 30)
    INR 168000 – INR 10500 = INR 157500

    Tax 30.9% on INR 157500 = INR 48667.5

    Now, I have seen my tax calculation sheet for this FY 16-17, I can see that I have an Income of INR 157500 added as taxable income.

    Now, Please guide me. I have already paid a tax of INR 48667.5 as Perq Tax and now I am again paying tax on Perquisites given by employer. Please help.

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