All About Employee Stock Option Plan (Esops) (As Amended By Finance Act-2020)

Employee Stock Option Plan (ESOPs) refers to the employee benefits scheme under which the employees are allowed to purchase the shares of their company at a below rate from the market price so that employee take much more interest in productivity and output of the work.

Basically this scheme is designed for various indirect benefits to the company like cost cutting in salary, more productivity and more output from the employee. Details analysis of various provision related to ESOPs, their taxability and amendment by Finance Act-2020 are given below:

Introduction:-

• ESOPs have been a significant component of the compensation for the employees of the companies & start-ups, as it allows the company owners and founders of start-ups to employ highly talented employees at a relatively low salary amount with balance being made up via ESOPs.
• Currently in India ESOPs are taxed as perquisites under section 17(2) of the Act read with Rule 3(8)(iii) of the Rules. The taxation of ESOPs is split into two components:

1. 1. Tax on perquisite as income from salary at the time of exercise.
   2. Tax on income from capital gain at the time of sale.

Various Stopping Points/Stages in ESOPs:-

• To know the taxability of ESOPs first we should understand the various stages in ESOPs journey which are as follows:

Taxability of ESOPs:-

Earlier to Amendment made by Finance Act-2020:

• After exercising the option, in the year of allotment of share the difference between fair market value (FMV) at the date of exercising of option and exercise pricee. amount paid by the employer is taxable as perquisite under the head income from salary under section 17(2) of the Income Tax Act-1961, Accordingly employer are required to deduct tax thereon in the year share are allotted.
• The tax on perquisite is required to be paid at the time of exercising of option which may lead to cash flow problem as this benefit of ESOP is in kind.

After Amendment made by Finance Act-2020 applicable w.e.f. A/Y 2021-22:

• By Finance Act-2020 amendment has been made, to consider the challenges faced both by employees and eligible start-ups and has sought to offer some relief in the form of deferring the Taxation of ESOPs, From the FY 2020-21, an employee receiving ESOPs from an eligible start-up need not pay tax in the year of exercising the option. The Tax on the ‘perquisite’ will be required to deposited within 14 days from earlier of the following events:  

1. 1. Expiry of five years from the year of allotment of ESOPs
   2. Date of sale of the ESOPs by the employee
   3. Date of termination of employment

• As per Section-191 of Income Tax Act-1961, if employer doesn’t deduct tax in subsequent year, employee shall be liable to pay tax directly.
• As per Section-156 of Income Tax Act-1961, if employee doesn’t pay tax directly, Assessing officer is empowered to issue notice of demand.

Who is Eligible Start-ups:-

• An entity is considered as an eligible start-up if it satisfies the following conditions:

1. 1. The start-up should be incorporated as a Company or LLP. It should be incorporated between 01^st April, 2016 and 31^st March, 2021.
   2. Turnover of entity for any of the five financial years since incorporation should not exceed Rs. 100 Crore.
   3. It must hold a certificate of eligible business from the Inter-Ministerial Board (IMB) under Department of Industrial Policy & Promotion (DIPP).

Disclaimer:- The contents of this article are solely for informational purpose.