The Hindu Business Line : Capital gains on ESOP shares

I was allotted 500 shares under employee stock option plan in December 2007. What will be the tax implications if I sell the same within 12 months? Can I claim exemption by reinvesting the proceeds in a property? — H. Praveen

The Finance Act, 2007 has amended the provisions of Section 115WB to provide that Employees Stock Options will also be a fringe benefit and fringe benefit tax will be payable on the same by the employer.

Section 115WKA has also been introduced in the Act to provide that such tax may be recovered by the employer from the employee. The value of fringe benefit is to be taken as the difference between the fair market value of the share on the date on which the option vests with the employee as reduced by the amount actually paid or recovered from the employee in respect of such shares.

The fair market value is to be determined in accordance with the method prescribed by the board in this regard. Section 49 of the Act has also been amended to provide that the cost of acquisition of such shares will be the fair market value which is taken for the purpose of determining the fringe benefit.

The fair market value taken for the purpose of determining the fringe benefit will be your cost of acquisition and this could be reduced from the full value of consideration in computing the capital gains.

You could also reduce expenses such as brokerage which are incurred wholly and exclusively for the purpose of the transfer in computing your capital gains. Since the shares have been held by you for less than 12 months the gain would be short term and if the shares are sold through a recognised stock exchange, the tax would be chargeable at 10 per cent (as increased by the appropriate surcharge and additional surcharge).

If the shares are not sold through a recognised stock exchange, the rate of tax would be based on the slab, which is applicable to you. As regards exemption, the same cannot be claimed by you since the gain is short term.

I purchased a plot of land in 1981 out of my own savings and constructed a house, in 1986, borrowing Rs 2.5-lakh from my mother. I was paying her interest on the loan until 2005, when she died. In her Will, she has waived the loan that she gave to me.

Before her death, she requested me to sell the property and share it with my two brothers, which I agreed to do. I now propose to gift one-third of the undivided share in land and house to each of my two brothers. If I were to sell this property, after say 3 months of gifting one-third to my brothers, will the gain be treated as long term or short term in my hands and in the hands of my brothers?

Can I claim an exemption by reinvesting my share of the amount realised in a flat that I have booked about a year before the sale and which is due for delivery sometime in June 2009? — V. Venkatesh

The gain that will arise from the sale of the property will be treated as long-term capital gains in your hands and also in the hands of your brothers. You may note that Section 2(42A) specifically provides that where an asset is received by certain modes, which includes a gift, the period of holding to determine whether the asset is long term or short term will also include the period for which the asset was held by the previous owner.

Therefore, in the case of your brothers the period for which the asset was held by you will also be included in determining whether the asset is long term or short term.

You can also claim an exemption in respect of your share in the long-term capital gain by reinvestment of the share in a flat. As far as a flat is concerned, which you have booked, apparently the same is under construction and will be regarded as a construction and not a purchase by you.

This would be relevant since Section 54, which allows the exemption requires that in case of purchase of another residential house, the same should be purchased one year before or two years after the date of transfer while in case of construction, the requirement is that the same should be completed within three years from the date of transfer.

In your case, the transfer would be some time in the middle of 2008 while the construction would be completed in June 2009, which is well within the time limit. You may also note that for this purpose what is relevant is that the completion should be within three years from the date of transfer. The date on which the construction was commenced could be even before the transfer and that will not affect your claim for the exemption.

I recently sold a land for Rs 1.8 lakh, which I bought in May 1998 for Rs 15,000. I would like to know what is the capital gains that would be charged to tax? Will there be any benefit available on account of inflation? What is the rate of tax in respect of such gain? In order to save tax what are the options available to me for investment and what is the time limit for such investment? — G. Surilimalai

The capital gains from the transaction will be Rs 1,56,453, which is computed as shown in the table. The cost inflation index for the financial year 1998-99 is 351 and for the financial year 2007-08 is 551. These are notified by the Government on an annual basis. The tax rate will be 20 per cent (as increased by the appropriate surcharge and additional surcharge) as provided for in Section 112. The investment options that will be available to you for claiming exemption will be either under Section 54F or under Section 54EC.

An exemption is available under Section 54F provided the following conditions are fulfilled:

The assessee is an individual or HUF.

The gain arises from the transfer of a long-term capital asset not being a residential house.

The assessee does not within a period of 2 years purchase or 3 years construct any residential house other than the new house.

The assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.

The quantum exempt will be on the following basis:

If the amount invested is more than or equal to the net consideration then the entire capital gain.

If the amount invested is less than the net consideration then the amount invested x capital gain/net consideration

Exemption may also be claimed by reinvestment under Section 54EC subject to satisfying the following conditions:

The asset transferred is a long-term capital asset

The investment is in bonds of the National Highway Authority of India or Rural Electrification Corporation.

The bonds are redeemable after a period of 3 years.

If the exemption should be claimed under Section 54EC, the investment should be made before the expiry of six months from the date of transfer of the capital asset. It may be noted that the maximum amount that can be reinvested in bonds for the purpose of this exemption cannot exceed Rs 50 lakh. Computation of long-term capital gains is as follows:

The full value of consideration — Rs 1.8 lakh

Less: Indexed cost of acquisition (cost of acquisition FY 1998-99) — Rs 15,000

Indexed cost (15,000 x 551/351) — Rs 23,547

Long-term capital gain — Rs 1,56,453.

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