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ESOP FBT Clarification

Notification on ESOP FBT :

  • Fair market value of the stock option is the value of hte share on the date of vesting, if the stock is listed on an Indian exchange. (Average of Open and Close price).
  • If it’s unlisted or listed in other exchanges (non Indian) the value must be determined by a “Category 1” merchant banker (registered with SEBI). Such merchant bankers are fairly big, and I think would now charge extremehly high fees for valuation.
  • Companies need to pay 33.99% of the difference between the fair market value and the grant price, and this FBT applies on the day of VESTING, not exercise.
  • I don’t know what happens to foreign listed companies, like Genpact, Rediff etc. whose employees get options in India. They’ll probably need a Cat 1 Merchant banker assessing them every six monts or so.
  • I also don’t know what happens if you don’t exercise on vesting – I’m assuming the company still needs to pay the tax, so they’ll soon find ways to get it from you.
  • This valuation clarification is only valid from Assessment Year starting 1st April 2008, meaning (thanks to commenter Pronto) that it has been valid since April 2007 for FY 07-08. Assessment years are the year after the actual financial year.
  • There’s still a lot of confusion, but this is very bad for unlisted startups, who now need to get themselves assessed every 6 months by a category 1 merchant banker, whose fees I would imagine are quite high. This is pure stupidity and spells the death knell for option grants as we know it.
  • I think innovative “structured” products will start appearing with third party entities holding stock and transferring them to the employee when required etc. This can be done using trusts, and I think we’ll go back to that era again.
  • Mumbai Journo says:

    >what do you think of dcmshriram consolidated and century enka. the former’s cash hoard EPS is worth more than the CMP while the latter is trading much below book value.

    do you think such stocks can be accumulated for long term investments?

  • pronto says:

    >Deepak, FBT still becomes applicable on date of exercise…if esops get vested but are not exercised, there is no FBT. FBT will be applicable on the date of exercise but on the difference between FMV on date of vesting and exercise price. Secondly, this is applicable for AY 08-09 — so from 1st of April, 2007. Check last line of notification (1st april 2008 is mentioned as it is the beginning of the AY)

  • Deepak Shenoy says:

    >Pronto: here’s the
    the actual clauise:

    “(ba) the fair market value of the specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB, on the date on which the option vests with the employee as reduced by the amount actually paid by, or recovered from, the employee in respect of such security or shares.”

    they say “the date the option vests”, meaning vesting and not exercise…

  • Deepak Shenoy says:

    >pronto: True – i forgot how assessment years work!

  • mahesh says:

    >Hey Deepak,
    Stumbled on your page by google.. Regarding the FBT, had a few doubts.
    1.what if the share price has gone down by a few times from the date of vesting?
    Eg: Alloted options at Rs. 6 and on the date of vesting it is Rs. 40. Subsequently the share price has come down to 8. For a lot of 100 shares,if you haven’t sold the shares on the date of vesting, you end up paying nearly 13Rs as tax 🙂

    Is this capital gains loss and how can this be offset for a normal salaried person who doesn’t have any capital gains ?

  • BusyBoy says:

    >Yes I also have the same question. If I have a notional ‘Capital Loss’ when I sell my ESOP stocks … as the Buying Price of ESOP would be the price on the ESOP vesting date … then can I adjust this Short Term Capital Gains Loss with my other Short term Capital gains Profit? That would help me a lot :-).Also my company is not passing on the FBT costs to the employee:-)

  • Deepak Shenoy says:

    >Well, if the stock price has gone down, there’s no difference to FBT – FBT is applicable on the day of vesting, so it doesn’t matter what happens after that.

    There’s no way to offset a capital loss if you don’t have a capital gain (in the same period – long term capital loss is only offset by long term capital gain etc.)

    busyboy: good stuff! which company?

    Also yes, you can offset short term capital loss against short term gain.

    Note however that I don’t know whether the FBT is deductible from the capital gains …no clarification to this effect.

  • Anonymous says:

    >Deepak, you are looking at the valuation section in isolation. Clause (ba)refers to clause (d) of sub-section (1) of section 115WB. This clause specifies what exactly is sought to be taxed as a fringe benefit. Here’s the actual clause – (d) any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees). It speaks of the security or shares transferred or alloted to the employee….an option is just the right but not an obligation to buy shares… put it differently, a (fringe) benefit will only arise when the employee owns shares at a concessional rate…a right to own shares is not the fringe benefit.

    Also, even the valuation clause (ba)refers to the amount recovered from the employee…while i agree that for shares offered at say nil value, the amount recovered will be nil…but the recovery issue will only arise upon exercise and not before.

    Therefore, I reiterate, FBT arises at the time of exercise (which anyway was the treatment before the amendment) and still continues….only diff is that earlier FBT was FMV at the time of exercise less exercise price, now it is FMV at the time of vesting less exercise price but always upon exercise.

  • pronto says:

    >btw that was pronto in the earlier post which came as anonymous

  • Deepak Shenoy says:

    >pronto: Thanks for that.

    Let’s see Clause (ba):
    ba) the fair market value of the specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB, on the date on which the option vests with the employee as reduced by the amount actually paid by, or recovered from, the employee in respect of such security or shares.

    Explanation.For the purposes of this clause,

    (i) fair market value means the value determined in accordance with the method as may be prescribed by the Board;

    (ii) option means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price;

    The phrase “on the date on which the option vests” refers to an option, not the share. But I think there is an element open to interpretation – since obviously the employee pays nothing for the option, and wouldn’t pay for the share unless he exercised. I don’t think there is clarity there, and the tax lawyers could see things either way.

    I’m not sure whether either interpretation changes things. It’s obvious that companies will have the FBT as a liability on the vesting date. They will want to recover it WHEN the liability arises, rather than leaving it for some later day when they have to pay it, because their accounting rules will have to deduct that much FBT on an ongoing basis. They would rather recover it from the employee as and when it occurs, otherwise it will hurt their bottomline unnecessarily.

    So what I think is that regardless of when FBT is actually paid, it assumes a value on the date of vesting, and companies are going to demand their FBT from the employee on that date (or in the quarter). Eventually means that the employee will probably need sell some part on exercise even if only to cover the FBT.

  • mahesh says:

    >Thanks Deepak for clarifying that and others for the clarification.

  • Puneet says:

    >Well, obviously I am a late comer, but this is a genuine question I have:

    1.) Is the employer supposed to provide fringe benefit details from ESOPs in form-16 or in Form 12BA(along with form-16)?
    1.1) If NO. What documents should I keep with me as a proof.

    2.) I have incurred short term capital Loss due to ESOP exercise. I am told that this can be squared off against any capital gains for next 8 years. So what documents will have the details of the capital loss? What documents should I keep with me, in case I am questioned by IT in future.

  • Mehul Shah says:

    >The Employer need not provide any Form 16 or Form 12BA as that is to be provided only for TDS on Salary. Also , as We have Annexureless returns, you need no Document to be attached to claim set-off of Short term Capital Loss