Deferment in Payment of Tax on ESOP’s “By Taxmann”

Deferment in Payment of Tax on ESOP’s “By Taxmann”

Provision & Computation with Example’s

The Finance Act, 2020, has allowed to defer the payment or deduction of tax on ESOPs allotted by an eligible start-up referred under Section 80-IAC. The tax is required to be paid or deducted in respect of such ESOPs within 14 days from the earliest of the following period:

  1. After expiry of 48 months from the end of Assessment year relevant to the financial year in which ESOPs are allotted;
    1. From the date the assessee ceases to be an employee of the organization; or
    1. From the date of sale of shares allotted under ESOP.

Reporting of amount deferred in respect of ESOPs

If an employee has received ESOPs from an eligible start-up referred to in Section 80-IAC in respect of which the tax has been deferred, the Part B of Schedule TTI (Computation of tax liability on total income) seeks the disclosure of the tax amount which has been deferred in this respect.

The ITR Form does not provide any guidance on the computation of the tax to be deferred. In such a situation, the tax to be deferred can be computed in accordance with the guidance give below.

Applicable rate of tax

As the perquisite arising from ESOPs shall be taxable in the year in which shares are allotted or transferred by the employer to employees, the tax shall be calculated on the basis of rates applicable in the year in which shares are allotted or transferred.

Example, 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., exercises his option to apply for the shares of the company in year 01. At the time of exercising of option, the fair market value of shares was Rs. 100. However, the company allots shares to Mr. A in Year 02. 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?

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.

How to calculate the amount of tax to be deferred?

An employee is required to disclose the value of perquisite from ESOPs in his return of income (Schedule TTI) of the year in which shares are allotted. However, due to the deferment of payment of tax, the employee shall not be required to pay tax on perquisite arising from ESOPs in such year. The tax to be payable on the salary income, excluding the perquisite value of ESOPs, should be computed as per following formula.

Tax payable on salary income excluding ESOPs perquisite=Tax on total income including ESOPs perquisitesXTotal income excluding ESOPs perquisites
————————
Total income including ESOPs perquisites

Example, Mr. A, working in a start-up company, has been allotted 100,000 shares at the rate of Rs. 10 per share under ESOP scheme in the Financial Year 2020-21. The fair market value of shares at the time of exercising of option by Mr. A is Rs. 100. The perquisite value of ESOPs taxable in the hands of Mr. A shall be Rs. 90 Lakhs [100,000 shares* (Rs. 100 – Rs. 10)]. The annual salary of Mr. A (excluding perquisite value of ESOPs) in that year is Rs. 40 Lakhs. He 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. What shall be the mechanism for deferment of TDS and tax on perquisite value of ESOPs in such a case?

Assessment Year 2021-22
Mr. A would be required to disclose the perquisite value of ESOPs, i.e., Rs. 90 lakh in his return of income but he shall not be liable to pay any tax thereon in the year of allotment of shares. The tax to be payable on the salary income, excluding the perquisite value of ESOPs, shall be computed in the following manner:

ParticularsAmount (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

Assessment Year 2026-27
As Mr. A continues with the company 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, the liability to deduct tax or make payment of tax on perquisite value of ESOP will arise in the Assessment Year 2026-27, i.e., after expiry of 48 months from the end of the Assessment year (2021-22) in which shares are allotted. The TDS shall be deducted within 14 days from the end of the assessment year 2025-26. The tax liability for the Assessment Year 2026-27 shall be computed as under:

ParticularsAmount (in Rs.)
Total tax liability for Assessment Year 2021-22 after considering perquisite value of ESOPs44,40,150
Less: Tax already paid at the time of filing of return for the Assessment Year 2021-2213,66,200
Differential amount to be deducted or paid by the employer or employee in the Assessment Year 2026-2730,73,950

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