Unexercised ESOP buyback gains taxable as LTCG, not salary income: ITAT

Mumbai: The Income Tax Appellate Tribunal (ITAT) in Bengaluru held that vested employee stock options do not become taxable as salary perquisites until they are exercised.

The bench ruled that gains arising from the repurchase of unexercised options are taxable as long-term capital gains (LTCG) and cannot be treated as salary perquisites. This ruling last week pertained to the case of a senior executive at ecommerce firm Flipkart, who received ₹2.33 crore after Flipkart Pvt Ltd, Singapore, repurchased 2,653 vested stock options he held.

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The executive, Pramod Kumar Jain, declared a gross salary of ₹1.90 crore and long-term capital gains of ₹2.43 crore in his return. The assessing officer, however, treated ₹2.33 crore received on the repurchase of the stock options as a perquisite under Section 17(2) of the Income Tax Act and held that it was taxable as salary income rather than LTCG. After his appeal was rejected by the Commissioner of Income Tax (Appeals), Jain challenged the order before the ITAT.

The bench held that since Jain never exercised the options and no shares were allotted to him, the options could not be treated as "specified securities" for taxation as a perquisite under Section 17(2)(vi) of the Income Tax Act.

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Taxability under this section arises only after the option is exercised, the tribunal said. "Until then, it is merely an employee's stock option, i.e., the option available to the employee to subscribe to the shares underlying the stock option, which cannot be considered to be a 'specified security' under the provisions of Section 17(2)(vi) of the Act," the bench, comprising judicial member Sandeep Singh Karhail and accountant member Balakrishnan S, held.

The ITAT held that the options represented a right to subscribe to shares at a future date and were therefore capital assets. The repurchase of those rights amounted to a transfer of the assets.