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T. Banusekar

I WORK for a software company whose shares are not quoted. I was allotted 5,000 shares of the company under an Employees Stock Option Plan (ESOP). The company could not go for a public issue as originally planned. I was also gifted 1,000 shares by the Managing Director (MD) of the company.

The company for which I work and in which I now hold 6,000 shares was acquired by another company. In the course of the acquisition, all the shares (including the 6,000 shares held by me) of my employer company were acquired by that other company. I have held the entire 6,000 shares for less than one year.

My MD however held the shares gifted to me for more than two years prior to gifting them to me. What will be the tax implications on sale of the 6,000 shares held by me?

G. Ramkumar

Reply

The 5,000 shares allotted to you under ESOP would not have been treated as a perquisite and taxed in your hands if the scheme was in accordance with the guidelines issued by the Central Government in Notification No. SO 1021(E) dated October 11, 2001. If this were so, the difference between the sale consideration of the 5,000 shares and the allotment price of the 5,000 shares would be treated as short-term capital gain and taxed in your hands in the year of its sale.

If the scheme had not been in accordance with the guidelines, there would have been a perquisite, which would have been taxed in your hands. In such a case, at the time of sale of the 5,000 shares, the difference between the sale price and the price that was adopted in computing the value of perquisite will be taxed as short-term capital gains. The tax that will be charged will be at the normal rates depending on the slab in which you fall.

The 1,000 shares gifted to you by your MD will be a long-term capital asset since it has been held by you and the previous owner, that is, your MD, for more than 12 months. The cost of acquisition in your hands will be taken as the cost to the previous owner. The gain will be computed by reducing the indexed cost of acquisition from the sale price. The gain being long term will be taxed at 20 per cent (increased by the appropriate surcharge and additional surcharge). You may note that since the sale is not through a recognised stock exchange, the benefit of the lower rate of tax in respect of short-term capital gains and the exemption in respect of long-term capital gains will not apply.

Query

I was allotted 300 shares under an ESOP by my employer. The allotment was made to me in October 2004. These were sold by me in November 2004. How is the gain to be computed, and is there any method to claim any exemption in respect of the gain? What will be the rate at which the capital gain is to be taxed?

K. Pari

Reply

If the ESOP was in accordance with the guidelines prescribed by the Central Government, there would have been no perquisite which would have been charged in your hands.

The capital gains will then be the difference between the sale price and the allotment price. If there had been a perquisite at the time of allotment because of the scheme not being in accordance with the guidelines of the Central Government, the capital gain would be the difference between the sale price and the value taken for determining the perquisite.

Since you have held the shares for less than 12 months the gain will be short-term. If the sale is through a recognised stock exchange, tax will be charged on such gain at 10 per cent (as increased by an appropriate surcharge and additional surcharge).

If the sale is not through a recognised stock exchange, tax will be charged on such gain at the normal rates depending on the slab in which you fall. There is no provision in the Act for claiming exemption in respect of such short-term capital gains. The tax will be payable in the manner explained above.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.)

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