ESOP (Employee stock options)/RSU (Restricted stock units) are taxed as perquisites under salary income, upon exercising of the options or on allotment of the shares as the case may be. The perquisite is the FMV (Fair Market Value) of the options/RSU’s as on the exercise/allotment date less amount paid for subscribing to the ESOP/RSU’s. Thereafter the FMV is treated as the cost of acquisition for computing capital gains on the subsequent sale of the options/RSU. In case of listed securities, market price becomes the FMV and for unlisted securities a FMV valuation is called for the purpose for perquisite computation. Whichever way seen, this FMV is fixed only for that time.
ESOP/RSU listed in Indian stock exchanges, if held for less than 12 months are treated as short-term assets. Unlisted both Indian/offshore ESOP/RSU’s are short-term assets if held for less than 24 months else long term. Long term capital gain has indexation benefit under the law.
Income tax act, 1961 permits intra/inter head set off of income within the scheduler system of taxation. Of this, inter head set off is not available for capital losses whereby capital losses both long-term and short-term are permitted to be offset only against income from capital gains and not from other income sources. Short-term capital losses are allowed to be set off against short/long term gains but long-term losses are allowed to be set off only against long-term capital gains.
It has been raining ESOP/RSU’s for employees especially due to the unicorn’s getting listed. SEBI has recently upped the promoters share off holding period from 30 to 90 days for India listed securities. Bereft this moratorium, post listing be it onshore/offshore; a number of ESOP/RSU are trade/sell at lower prices to their FMV primarily due to bloated issue price valuations. This results in short/long term capital losses to the employees upon sale.
Taxed as perks
These ESOP/RSU’s were taxed as perks on notional FMV value without actual cash salary benefits, rather a full/partial cash outflow to procure the ESOP/RSU’s might have happened, thus to some extent taxation minus cash inflow of income. Contrarily, the capital losses arising on sale is sans any set off benefit against the already taxed FMV perks due to the restriction on inter head set off provision of capital losses against other incomes. Offsetting these capital losses against salary income would give a fair play. It is quite possible that the perk might have got taxed in one previous year and the capital loss on sale might arise in a subsequent year thereby resulting in a downward scaling of the salary income in the subsequent year of sale/set off.
In the year of the perks taxation, the taxman gained by collecting taxes early and in the year of set off, there is release of the same thus appears to be fair if permitted. Even on time value of money with/without indexation the case deserves a better treatment to permit such inter head set off as a special case.
Puritan practitioners of the law scoffing at this requested set off ought to appreciate, what is being requested as set off is like income of the same genre but treated dichotomously under the law. This discussion is neither a stranger under the law. Consider a case of short-term capital loss arising from sale of depreciable asset which remain as the only block in a business alongside a business profit. The debate would be similar whether set off can be permitted of the two though both being different heads of income but of the same genre i.e. business.
As for identity of the shares granted as ESOP/RSU’s; income tax law permits assessees to maintain two different portfolios viz. one for trading and one as investment. The Demat accounts and the scrip numbers can aid to correlate a one-on-one linkage to permit this inter head set off facility.
Undoubtedly this will give respite to the employees besides bring in real income based taxation on ESOP/RSU’s. It was remarked by the Apex court in Shoorji Vallabhdas & Co. 1962 46 ITR 144 (SC) that, Income-tax is a levy on real income and not on hypothetical income. ESOP taxation certainly warrants fresh relook in the changed circumstances.
The writer is a chartered accountant