There Is No Tax Implication On ESOPs At Time Of Allotment

My employer gave me shares under the employee stock option plans (ESOP) two years back. It is an unlisted company. I will exercise the option in January 2023. If I sell these shares immediately, what will be my tax liability?

In respect of shares allotted under ESOP, the tax is levied at two stages. There is no tax implication when the ESOPs are allotted to you. But, when you exercise the option, the difference between the exercise price (the price at which you get the shares) and the fair market value of the shares is treated as your perquisite, and added to your salary. Your employer will deduct tax at source on the difference between the price paid by you and the fair market value of the shares allotted to you.

The second incidence of tax arises when you sell these shares. The same is taxed as capital gains. The rate of tax on capital gains would depend on the whether the capital gains are long term or short term. For listed shares, the profits would be treated as long-term capital gains (LTCG) if the shares have been held for 12 months or more. For unlisted shares, the holding period requirement to make the profit long term is 24 months. LTCG on unlisted shares are taxed at 20 per cent plus cess after applying the cost inflation index to the cost of purchases. The short-term capital gains (STCG) on unlisted shares would be included in your regular income and taxed at your slab rate. Since the shares are unlisted and you are planning to sell these shares before 24 months of allotment, the profits will be treated as STCG and taxed at your slab rate.

LTCG on listed shares which are sold on the stock exchange are taxed at a flat 10 per cent without indexation after initial Rs 1 lakh for all listed shares and equity mutual fund schemes taken together. Such STCG are taxed at flat rate of 15 per cent.  

How many times can a person invest LTCG from sale of a residential house in another residential houses?

According to Section 54 of the Income-tax Act, 1961, there are no restrictions as to the number of times a person can claim exemption from payment of tax on LTCG arising on sale of a residential house by investing such LTCG in another residential house.

Likewise, there is no restriction as to the number of residential houses one can own on the date of sale or investment. The exemption for LTCG arising from sale of a residential house can be claimed by investing the capital gains in one residential house in India.

However, as an exception, an individual or a Hindu Undivided Family (HUF) is allowed to claim exemption in respect of LTCG arising from sale of one residential house in two residential house provided the amount of LTCG does not exceed Rs. 2 crore. This option to invest the LTCG from sale of one residential house in two residential house in available only once in the lifetime of the taxpayer. Also, the exemption of LTCG is available only if the residential house which you are planning to sell has been held by you for 24 months or more on the date of sale.

The author is a tax and investment expert

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)