What all has been covered in this Presentation:- 1. About ESOPs a. What are ESOPs? b. How ESOPs Work? c. Stages in ESOPS 2. Taxation of ESOPs a. Computation of Perquisite Value b. Determination of Fair Market Value of Listed Shares c. Determination of Fair Market Value of Un-Listed Shares d. Deduction of Tax 3. Deferment of Tax a. Amendments by the Finance Act, 2020 b. Meaning of Eligible Start-Up c. Deferment of TDS under Section 192 d. Calculation of Tax to be Deferred e. Consequences of Failure to Deduct Tax f. Direct Payment of Tax by Employee 4. Taxation of ESOPs (Transfer of Share) a. Computation of Capital Gains 5. Taxation of ESOPs - Summary

1. Impact of Finance Act, 2020
on Taxation of
ESOPs
(21 April 2020 | CA Naveen Wadhwa)

2. 01
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02

4. INTRODUCTION
03
AGENDA FOR WEBINAR.
04 ABOUT ESOPs06
DEFERMENT
OF TAX16
TAXATION OF
ESOPs
(Transfer of Shares)
29
TAXATION OF
ESOPs
(Allotment of Shares)
11
OVERVIEW31

5. 01. INTRODUCTION

6. INTRODUCTION.
Current provisions of the Income-tax Act require levy and
collection of tax in the same financial year in which an
income is taxable
However, there are a few provisions which allow deferment
of tax to that year in which income is realised
Examples, Interest on compensation or enhanced
compensation, conversion of capital asset into stock-in-
trade, etc.
The Finance Act, 2020 defers the collection of tax on the
value of perquisite arising from allotment of shares under
ESOPs.
05

7. 02. ABOUT ESOPs

8. WHAT ARE ESOPs?
It is an employee benefit scheme
Through this scheme a company provides option to the
employees to acquire its shares at discounted price or free
of cost
It works to achieve twin-fold purpose both for the company
and the employees
It gives motivation to the employees. After owning a stake in
the company, they feel responsible for the performance of
the company
It helps the employer to retain the top talent and assure the
right level of performance in work
07

9. HOW ESOPs WORK?
Cos. provide an option to employees to acquire certain
number of shares at a predetermined price
Such option can be exercised by the employee after certain
waiting period which is called as ‘Vesting Period’
The date on which the employee becomes entitled to
exercise the right to acquire the shares is called “vesting
date”
Example, On April 1, Year 00, XYZ India Private Limited grants
ESOP to its employee Mr. A to purchase 1,000 shares at a
pre-determined price of Rs 100 per share. Date of vesting of
ESOP is April 1, Year 04. Thus, Mr. A can exercise the right to
exercise shares on or after April 1, Year 04.
08

10. STAGES IN ESOPS.
No tax implications arise in the first three phases
Key Stages
Grant of Options
Allotment of Shares
Vesting of Options
Transfer of Shares
Exercising the Option
09
The tax implications arise only in the last two stages

11. Difference between FMV of shares and
amount recovered from employee is
taxable as perquisite
Allotment of Shares
Transfer of Shares
Difference between sale
consideration and FMV of
shares is taxable under the
head capital gain
STAGES IN ESOPs (Cont’d…)
10

12. 03. TAXATION OF ESOPs
(Allotment of Shares)

13. The benefit accruing to the employee from allotment of shares under ESOP scheme is treated as
perquisite and chargeable to tax under the head ‘Salary’ in the year of allotment of shares. The perquisite
value shall be determined in following steps.
COMPUTATION OF PERQUISITE VALUE.
12
Step 1: Determine the FMV of Shares
The Fair Market Value of shares to be determined on the date on which employee exercises the option.
The FMV shall be determined as per provisions of Rule 3(8).
Separate valuation rules for Listed Shares and Unlisted Shares
Self-assessment for listed shares and Merchant Banker’s report for unlisted shares
Step 2: Price to be paid by employee
Determine the value paid or to be paid by the employee to the employer at the time of exercising of option.
Value of perquisite = (Step 1 – Step 2) * Number of shares allotted to the employee

14. DETERMINATION OF FMV OF LISTED SHARES.
13
Listing
Trading on the Date of
Exercise of Option
Fair Market Value
Listed on one stock
exchange
Yes
Average of opening and closing price of the share on the date of
exercising the option
No
Closing price of the share on the date closest to the date of exercising
of ESOP and immediately preceding such date
Listed on more than one
stock exchange
Yes
Average of opening and closing price of the share (on the date of
exercising the option) on that stock exchange which records highest
volume of trading in that share
No
Closing price of the share on the date closest to exercise date and
immediately preceding such date on that stock exchange which
records highest volume of trading in the such share

15. DETERMINATION OF FMV OF UNLISTED SHARES.
FMV as determined by the
merchant banker on the
date of exercise of ESOP
FMV as determined by the
merchant banker on any
date earlier than date of
exercise (not more than
180 days earlier than
exercise date).
14
Option 1 Option 2

16. The employer shall deduct tax under Section 192 at the time of payment of salary
The salary shall include the value of perquisite arising from allotment of shares
Employee is liable to pay the advance tax or self-assessment tax if employer fails to deduct tax [Section 191]
The Finance Act, 2020 has made amendments to the relevant provisions of the Income-tax Act to defer the
collection of tax on perquisite value of ESOPs
The benefit is given to the eligible Start-ups only
DEDUCTION OF TAX.
15

17. 04. DEFERMENT OF TAX

18. Employees do not get any immediate monetary benefit due to allotment of shares under the ESOPs.
However, payment of tax thereon in the year of allotment of shares is very burdensome as it reduces the
cash flow in their hands
AMENDMENTS BY THE FINANCE ACT, 2020.
17
Rationale Behind the Amendment
To reduce this burden, the Finance Act, 2020 has amended various sections of the Income-tax Act to
defer the payment of tax
This benefit shall be available only to the employees of an eligible start-up
Only collection of tax has been deferred. The income is still computed in the year in which shares are
allotted
The taxable value of perquisite shall be considered for calculation of tax and surcharge thereon
Amendments by the Finance Act, 2020

19. AMENDMENTS BY THE FINANCE ACT, 2020 (CONT’D…)
18
List of Sections amended by the Finance Act, 2020 with effect from Assessment Year 2021-22
Section Impact of Amendment
192 Eligible start-ups shall be able to defer the deduction of tax on perquisite value of ESOPs to subsequent years.
140A Employees shall be able to defer the tax liability in respect of perquisite value of ESOPs to subsequent years.
191 If employer doesn’t deduct tax in subsequent year, employee shall be liable to pay tax directly.
156 If employee doesn’t pay tax directly, Assessing officer is empowered to issue notice of demand.
Note: As Section 17(2)(vi) has not been amended, the income shall be computed in the year in which
shares are allotted but tax shall be paid in subsequent year.

20. MEANING OF AN ELIGIBLE START-UP.
19
Tax on the perquisite value arising from ESOPs shall be deferred only if the employer is an eligible
start-up. An entity is considered as an eligible start-up if it satisfies the following conditions.
Particulars Eligible start-up as defined under section 80-IAC
Incorporation The start-up should be incorporated as a Company or LLP
Date of Incorporation It should be incorporated between 01-04-2016 and 31-03-2021
Eligible Business The entity should be working towards innovation, development or improvement of products
or processes or services, or if it is a scalable business model with a high potential of
employment generation or wealth creation
Total Turnover Turnover of entity for any of the financial years since incorporation/ registration should not
exceed Rs. 100 crore
Certification It must hold a certificate of eligible business from the Inter-Ministerial Board of Certification

21. Section 192 provides for deduction of tax by the employer from salary of the employee. This provision
has been amended by the Finance Act, 2020 that an eligible start-up as referred to in section 80-IAC shall
deduct tax from income in the nature of perquisites arising from allotment of shares under ESOPs within
14 days from the happening of any the following events (whichever is earlier):
From the expiry of 48 months from the end of Assessment year in which shares are allotted
under ESOPs;
From the date the assessee ceases to be the employee of the organization; or
From the date of sale of shares allotted under ESOP.
DEFERMENT OF TDS UNDER SECTION 192
20
Amendment to Section 192
Note: The tax to be deducted shall be computed on the basis of rates in force for the financial year in
which shares are allotted or transferred under ESOPs.

22. X Pvt. Ltd launched an Employee Stock Option Scheme for its employee in year 00 under which shares of
the company would be allotted to employees at free of cost. Mr. A, one of the employees of X Pvt. Ltd.,
exercise his option to apply for the shares of the company in year 01. However, the company allots shares
to Mr. A in Year 02. At the time of exercising of option by Mr. A, the fair market value of shares was Rs.
100, which increased to Rs.150 in the year of allotment of shares. What shall be the amount of perquisite
and in which year it shall be chargeable to tax in hands of Mr. A and at what rate?
DEFERMENT OF TDS UNDER SECTION 192 (CONT’D…)
21
Example
Answer
In the above example, the amount of perquisite chargeable to tax in the hands of Mr. A shall be the fair
market value of shares on the date of exercising of option, i.e., Rs. 100 and it shall be chargeable to tax in
the year in which shares are allotted by the company, i.e., Year 02. Thus, tax on perquisite shall be
calculated at the rate as applicable in Year 02.

23. CALCULATION OF TAX TO BE DEFERRED.
Calculation of tax to be deferred
The tax to be payable on the perquisite arising from ESOPs should be computed as per following formula:
22
The tax to be payable
on the perquisite arising
from ESOPs
=
Tax on total income
including ESOPs
perquisites
X
Value of ESOPs perquisites
Total income including ESOPs
perquisites

24. CALCULATION OF TAX TO BE DEFERRED (CONT’D…)
23
Example, Mr. A, working in an eligible start-up company, has been allotted shares in the Financial Year
2020-21 as follows:
Particulars Description
No. of shares allotted (A) Rs. 1,00,000
Rate of allotment (B) Rs. 10 per share
Fair Market value at the time of exercise of option (C) Rs. 100 per share
Value of perquisite in nature of ESOPs [D = (C - B) * A Rs. 90 Lakhs
Annual Salary (Excluding ESOPs) Rs. 40 Lakhs
Assume, Mr. A continues with the company even after expiry of 48 months from the end of the assessment
year in which shares are allotted and he does not sell the shares even after expiry of said period

25. CALCULATION OF TAX TO BE DEFERRED (CONT’D…)
24
Assessment Year 2021-22
The tax to be payable on the salary income, excluding the perquisite value of ESOPs:
Particulars Amount (in Rs.)
Total Income before including perquisite value of ESOPs (A) 40,00,000
Add: Perquisite Value of ESOPs (B) 90,00,000
Total Income after including perquisite value of ESOPs (C) 1,30,00,000
Tax on Rs. 1.30 crore as per slab rates applicable for Assessment Year 2021-22 as per old taxation regime (D) 37,12,500
Add: Surcharge [E = D * 15%] 5,56,875
Add: Education Cess [F = (D + E) * 4%] 1,70,775
Total tax liability for Assessment Year 2021-22 after considering perquisite value of ESOPs [G = D + E + F] 44,40,150
Tax liability attributable to salary income (excluding the perquisite of ESOPs) [G * A / C] 13,66,200

26. CALCULATION OF TAX TO BE DEFERRED (CONT’D…)
25
Assessment Year 2025-26
As Mr. A continues with the company, the liability to deduct tax or make payment of tax on perquisite value
of ESOP will arise in the Assessment Year 2025-26.
The tax liability for the Assessment Year 2025-26 shall be computed as under:
Particulars Amount (in Rs.)
Total tax liability for Assessment Year 2021-22 after considering perquisite value of ESOPs 44,40,150
Less: Tax already paid at the time of filing of return for the Assessment Year 2021-22 13,66,200
Differential amount to be deducted or paid by the employer or employee in the Assessment Year 2025-26 30,73,950

27. CONSEQUENCES OF FAILURE TO DEDUCT TAX
26
Section 201 of the Income-tax act, 1961, provides that where a person who was liable for deduction of
tax at source fails to deduct or after deduction fails to pay such tax to the credit of the central
government, he shall be deemed as assessee-in-default. Following are the consequences for such failure:
Particulars Section Description
Interest Section 201(1A) 1% per month for failure to deduct tax or 1.5% per month for failure to pay tax
Penalty Section 271C Amount of tax which he fails to deduct or pay
Prosecution Section 276B For a period not less than 3 months but which may extend to 7 years and with fine
Note: However, the employer will not be treated as an assessee-in-default if employees pays tax on such
income and includes such income in the return submitted under Section 139. The employee will have to
obtain a certificate to this effect from a CA in Form No. 26A and submit it electronically

28. If an employer does not deduct tax on perquisites arising from ESOPs then tax shall be payable by the
employee directly on the basis of rates in force for the financial year in which shares are allotted or
transferred. Tax shall be paid within 14 days from the happening of any the following events (whichever
is earlier):
From the expiry of 48 months from the end of Assessment year in which shares are allotted
under ESOPs;
From the date the assessee ceases to be the employee of the organization; or
From the date of sale of shares allotted under ESOP.v
DIRECT PAYMENT OF TAX BY EMPLOYEE
27
Amendment to Section 191
Note: If an employee does not pay tax directly, the Assessing Officer can issue a notice of demand under
section 156. If employees fails to deposit tax in response to such notice, he shall be deemed to be
assessee-in-default.

29. DIRECT PAYMENT OF TAX BY EMPLOYEE (CONT’D…)
Section 140A of the income-tax act, 1961, provides for computation and payment of self-assessment tax. It has
been amended to provide for deduction of tax on perquisite arising from ESOPs while computing self assessment
tax.
28
How to defer the payment of tax?
Section 140A of the income-tax act, 1961, provides for computation and payment of self-assessment tax. It has been
amended to provide for deduction of tax on perquisite arising from ESOPs while computing self assessment tax.
Particulars Amount
Gross tax liability
Less:
- MAT Credit or AMT Credit
- Relief under Section 89
- Foreign tax credit under Section 90, 90A or 91
xxx
(xxx)
(xxx)
(xxx)
Net tax liability
Add:
- Interest or fees under Section 234A, 234B, 234C, 234F
xxx
xxx
Aggregate tax liability
Less: Prepaid/Deferred Taxes
- TDS deducted
- TCS collected
- Advance tax paid
- Deferred amount of tax or interest in respect of ESOPs
xxx
(xxx)
(xxx)
(xxx)
(xxx)
Total tax payable/ refundable on self-assessment xxx

30. 05. TAXATION OF ESOPs
(Transfer of Shares)

31. COMPUTATION OF CAPITAL GAINS.
30
When an employee sells shares allotted under ESOP, the resultant gain or loss shall be taxable under the head capital
gains. For computation of capital gain, following provisions are relevant:
Period of Holding
The period of holding shall commence from date of allotment of shares (not from date of exercising of option) and
end on date on which employee sells the shares.
Long-term capital assets: If held for more than 12 months (listed shares) and 24 months (unlisted shares).
Cost of Acquisition
The fair market value of shares considered for calculation of value of perquisite shall be taken as the cost of acquisition
of such shares.
Tax Rates
Particulars Listed Shares Unlisted Shares
Tax on short-term capital gain 15% Normal Tax Rate
Tax on long-term capital gain 10% on capital gain exceeding Rs. 1,00,000 Resident- 20% with indexation
Non-resident- 10% without indexation

32. 06. OVERVIEW

33. TAXATION OF ESOPS – SUMMARY.
32
Point of Taxation
Nature of
Income
Computation of Income
Tax Rate
Resident Non-resident
At the time of
allotment of
shares
Perquisite
FMV of shares at the time of
exercising of option minus
Amount recovered from employee
Normal Tax Rate [Note 3] Normal Tax Rate [Note 3]
At the time of sale
of shares
Short-term capital
gain
Sale Consideration minus Cost of
Acquisition[Note 2]
15% in case of listed
shares otherwise
normal tax rate
15% in case of listed shares
otherwise normal tax rate
Long-term capital
gain
Sale Consideration minus Indexed
Cost of Acquisition[Note 2]
10% in case of listed
shares[Note 1] otherwise
20%
10% without indexation[Note 1]
Note 1: In case of listed shares, no tax shall be levied if the aggregate amount of long-term capital gain doesn’t exceed Rs. 1 lakh.
If amount of capital gain exceeds Rs. 1 lakh then tax shall be levied at the rate of 10% on the amount of capital gain exceeding Rs.
1 lakh.
Note 2: Cost of acquisition of shares allotted under ESOP shall be the FMV of shares considered for calculation of perquisite.
Note 3: The tax shall be deferred if employer is an eligible start-up.

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