After the fringe benefit tax (FBT) was withdrawn in Budget 2009-10, the government has shifted the burden of employee stock ownership plans (ESOPs) on individual tax payers, who may have to pay as much as 30 per cent tax in the highest bracket. This seems to be in line with the international practice of ESOPs and has been long demanded by the industry. ESOPs are generally given by employers as incentives to high performers. These are transferred to an employee over a period of time. Once the ESOPs are announced, these are transferred in a phased manner over a period of around six months to one year.

According to the clause that is to be inserted in the Income Tax Act, the value of the perk is likely to be calculated as the difference between the fair market value (FMV) on the date of exercise of the option and the actual price paid by the employee. The value of such shares would be added to the employee’s income and taxed. ESPOs were brought under the ambit of FBT in 2007. The employers, then, were charged at 33.99 per cent on the fair market value of the option on the vesting date; however, the payment was deferred till the option was exercised by the employee. The differential between the vesting value (market value of the stock at the time of offer to the employee) and the ultimate sale price was capital gains in the hands of the employee, subject to exemption from long-term capital gains.