Taxability of Gains on Transfer of ESOP Options

ESOP or Employee Share Options Plan is the option that a company provides to its employees to purchase the company’s shares on future dates at a pre-determined price.

Will transfer of option itself by an employee results in capital gains?

Was per Section.2(14) of the Income Tax Act, 1961, the term “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession subject to some exceptions

Under the light of above definition, options being valuable right held in order to exercise and to have allotment of shares are thus treated as capital asset.

Thus ,when a person transfers the options which were allotted to him, tax will be levied on the amount of profits or gains arising from such transaction under the head ‘Capital Gains’.


How such gains will be classified as short term /long term?

The resulting capital gains can further be classified as ‘Short Term Capital Gains’ and ‘Long Term Capital Gains’ depending upon the Period of holding of such options

Whether the period of holding starts from Date of Grant / Date of Vesting?

In N.R.Ravikrishnan vs. ACIT (ITAT Bangalore) dated 31.10.2018, It was held that the holding period of options should be considered from the Date of grant of options and the right to exercise options, right to transfer options, vesting date are all not relevant for ascertaining the holding period of such options.

Example illustrating on how sale of ESOP options is taxed?

N.R.Ravikrishnan an employee of Infosys Technologies Ltd., was granted 2,5000 ESOP options on 28.02.2013. The vesting date being 28.02.2015 All such options were subsequently vide Option Transfer Agreement dated 07.02.2017 transferred to/bought back by Infosys Technologies Ltd.,

At the time transfer of options to Infosys Technologies Ltd., the fair value of the consideration received by N.R.Ravikrishnan is Rs.25,00,000/-

Taxation :

In the given case, of holding of options in the hands of N.R.Ravikrishnan is more than 3years (calculated from the Date of Grant i.e., 28.02.2013 and the vesting date is ignored for calculating holding period). So the gains will be classified as Long -term Capital gains and will be taxable at the rate of 20.6%(20%Tax + 3%Cess)

Here, Capital gains
= Sale proceeds – Cost of Acquisition of options
= Rs.25,00,000-Rs.0
= Rs.25,00,000/-
= Rs.25,00,000*20.6%
= Rs.5,15,000/-


Thus, from the analysis of Section.2(14) read with other provisions of the Income tax act ,1961 transfer of ESOP options by an employee would results in Capital gains.

Further as validated by the case law N.R.Ravikrishnan vs. ACIT (ITAT Bangalore) dated 31.10.2018, while calculating such gains from transfer of ESOP options, holding period should be considered from the date of grant of such options rather from vesting date.

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