Income TaxCapital Gains Sweat Equity or is it that Equity Sweats

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The Tax Publishers Income Tax--Capital Gains Sweat Equity or is it that Equity Sweats Srivatsan Ranganathan Taxation of sweat equity/ESOP/RSU happens in two stages. It could throw open a number of possibilities. The author has dealt one example with certain takeaways emerging on the same. 1. Startup to sweat equity There has been a trend in awarding ESOP's/RSU's (Employee stock options plan/Restricted stock units) to employees by Unicorns and by a lot of startup entities. The ESOP's/RSU's allotted might be those of the parent foreign holding entity as well and not necessarily of the Indian entity. The ESOP's/RSU's might be of entities which are unlisted as well. Income tax law treats foreign listed entity shares as unlisted shares. Then the holding period to recap, an unlisted share is treated as a long term asset if it is held for more than 24 months while it remains 12 months for listed Indian shares. The taxability of ESOP's/RSU's happens in two stages under the income tax law. First, upon vesting it is treated as a perquisite taxable under section 17(2) with the fair market value (FMV) on date of exercising being the value of the perquisite. Thereafter when it is sold, the sale value less the already taxed FMV is taxed as long or short term capital gain depending on the period of holding of the said shares. There is normally a cooling period before employee is permitted to sell shares bereft exceptional reasons (like selling to pay perk tax). For eligible startups meeting conditions of section 80IAC the perquisite taxation can be postponed by those start up employees on the ESOP's/RSU's to 5 years or in the year of sale whichever is lower. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Capital Gains

Sweat Equity or is it that Equity Sweats

Srivatsan Ranganathan

Taxation of sweat equity/ESOP/RSU happens in two stages. It could throw open a number of possibilities. The author has dealt one example with certain takeaways emerging on the same.

1. Startup to sweat equity

There has been a trend in awarding ESOP's/RSU's (Employee stock options plan/Restricted stock units) to employees by Unicorns and by a lot of startup entities. The ESOP's/RSU's allotted might be those of the parent foreign holding entity as well and not necessarily of the Indian entity. The ESOP's/RSU's might be of entities which are unlisted as well. Income tax law treats foreign listed entity shares as unlisted shares. Then the holding period to recap, an unlisted share is treated as a long term asset if it is held for more than 24 months while it remains 12 months for listed Indian shares. The taxability of ESOP's/RSU's happens in two stages under the income tax law. First, upon vesting it is treated as a perquisite taxable under section 17(2) with the fair market value (FMV) on date of exercising being the value of the perquisite. Thereafter when it is sold, the sale value less the already taxed FMV is taxed as long or short term capital gain depending on the period of holding of the said shares. There is normally a cooling period before employee is permitted to sell shares bereft exceptional reasons (like selling to pay perk tax). For eligible startups meeting conditions of section 80IAC the perquisite taxation can be postponed by those start up employees on the ESOP's/RSU's to 5 years or in the year of sale whichever is lower.