Employee Stock Ownership Plans (ESOPs) are a popular way for companies to reward and retain talent. But while the idea of owning company shares is exciting, it also brings tax implications especially TDS on ESOP. Whether you're an employee planning to exercise your stock options or an employer managing payroll compliance, knowing the TDS process is essential to avoid costly missteps.
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Understanding TDS on ESOP
TDS on Employee Stock Ownership Plans (ESOPs) kicks in when an employee exercises their stock options. The taxable income is calculated as the difference between the Fair Market Value (FMV) on the exercise date and the exercise price. This is considered a perquisite under 'salaries' as per the Income Tax Act.
Employers are responsible for deducting TDS currently 30% plus surcharge and cess on this perquisite. The deducted amount is deposited with the government, and the employee can adjust it against their final tax liability while filing their return. Staying on top of these steps ensures a smooth experience for both parties.
What is an ESOP in TDS?
In taxation terms, an Employee Stock Ownership Plan (ESOP) becomes relevant for TDS the moment it is exercised by the employee. When you choose to exercise your ESOPs, the gain you receive—calculated as the difference between the Fair Market Value (FMV) of the shares and the exercise price you pay—is classified as a salary perquisite under the Income Tax Act. Employers are legally obligated to deduct tax at source on this perquisite, just like they would on your salary. This deducted amount is deposited with the government and reflected in your Form 16, which serves as proof of tax paid when filing your returns. Additionally, ESOP issuance and related disclosures must also comply with provisions under the Companies Act, 2013, especially in the case of unlisted companies.
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How TDS applies to ESOPs?
TDS on ESOPs becomes applicable precisely at the moment when the stock options are exercised not when they are granted or vested. At this point, the difference between the FMV on the date of exercise and the exercise price you pay to purchase the shares is treated as taxable income under the head ‘salaries’.
Employers are required to deduct TDS at 30% plus applicable surcharge and cess on this amount and deposit it with the income tax department. This deduction is clearly mentioned in your Form 16, which can then be used to reconcile and claim tax credits while filing your income tax return.
