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.
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.
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. The tribunal held that the gains from the repurchase were taxable as capital gains and that Jain rightly offered the consideration as long-term capital gains.
For salaried employees participating in ESOP schemes, the ruling is significant because the tax treatment can differ depending on how the employee exits the ESOP, said chartered accountant Ashish Karundia.
“The tax treatment is not the same for every ESOP-related receipt. The way an employee exits the ESOP, by exercising the option and acquiring shares or by accepting a buyback of vested options from the company, can materially influence how the receipt is taxed,” Karundia told ET.
Karundia, however, pointed out that Section 46A of the Income Tax Act, 1961 [Section 69 of the Income Tax Act, 2025] does not appear to have been placed before the tribunal for consideration. The provision specifically deals with a company buying back its own shares or other specified securities and includes employee stock options.
“Where the issuing company repurchases vested ESOPs, the transaction could be examined under this specific provision,” Karundia said.
The bench also rejected the tax department’s reliance on Form 16 and tax deducted at source for arriving at its conclusion. It said deduction of tax at source is only an advance mechanism for collection and “is not the ultimate determinative factor on the taxability of income in the hands of the payee”.
