Even as promoters across the country are talking a new language and employees are waiting to capitalise on a rising tide of stock options, the income-tax department seems to be bent on making holes in their boats. The issue in contention is the double taxation that employees are liable to incur for their stock options.
Under the current rules, an employee is liable to pay a 33 per cent income-tax on the difference between the price of grant and the prevailing market price of the share. Say an employee gets 100 shares at an option price of Rs 10 each while the prevailing market price is Rs 200. The market value of the shares being Rs 20,000, the income-tax department ordains that the employee stands to gain Rs 19,000, which is the difference between the acquisition price and the market price. This is the perquisite value of the share and hence, the department holds, the employee should pay an income-tax of Rs 6,270 at the rate of 33 per cent. This tax is chargeable on the allotment of shares. According to experts, this defeats the very objective of the stock options plan of making the employee share in the future of the company as this may force the employee to sell off the securities just to pay up the taxes.
This is not all. Should the employee not sell the shares but choose instead to sit on them for a year, and if in that time the market price rises to Rs 250, he is again liable to pay a capital gains tax on the difference between the exercise price of the option and the sale price. Experts feel that this double-taxation could prove to be a significant hindrance to Employee Stock Option Programmes in the country.
The matter is currently before the courts.