Employee Share Scheme

(also called Stock Option Scheme)

 FMV 25

Cost paid 6
Taxable 19
under salary
Definition and general concept
A company being an employer may issue shares of the
company to its employees free of charge as an employment
benefit.

However, a company may charge an amount (called exercise

price) against the issue of option and / or shares which is less
than FMV and therefore an employment benefit arises.
(2) Right or option to acquire shares:
Right or option to acquire shares is taxable only where the
employee disposes the option in which case gain is taxable in
the year of disposal of option under the head salary as
consideration received i.e. sale proceed less cost of right or
option.
3) Issue of shares:
(i) Shares may be issued to employees without any restriction
on transfer or it may be with restriction on transfer.

Taxability of an amount under the head salary is:

Issue without any Issue with restriction on
restriction transfer
a) Taxable in the year of
issue of shares.

b) Taxable at FMV at the

date of issue of shares less
any consideration given by
the employee for shares /
option or right.
Issue without any
restriction
a) Taxable in the year of Taxable in the year in which the
issue of shares.
b) Taxable at FMV at the
date of issue of shares less
any consideration given by
the employee for shares /
option or right.
Issue with restriction on
transfer
employee has a free right to
transfer the shares.
Taxable at FMV at the date at
which the employee has a free
right to transfer the shares less
any consideration given by the
employee for shares / option or
right.
 FMV 25 Subsequent Disposal
Sale value 29
Cost paid 6 Cost
Taxable 19 6 + 19 25
under salary Capital gain 4

(4) Gain on shares subsequently disposed off falls under the

head capital gain and for this purpose cost of shares shall be
the total of consideration given by the employee for shares /
option or right and the amount taxed under the head salary in
this respect.
Question:
Mr. A got an option of 500 shares under ESS from a private
company. He paid Rs.3 per share for the option and is required to
pay Rs.7 per share at the time of exercise of option.
4
He exercised option by paying Rs.3,500 for 500 shares to the
company when the FMV of shares was Rs.33 per share.

Subsequently, he disposed off the shares for Rs.39 per share

Solution:
SALARY
FMV of shares 500 shares x 33 16,500
Cost 500 x (Rs.7 + 3) (5,000) 11,500

CAPITAL GAIN
Consideration received 500 x 39 19,500
Cost 500 x (Rs.7 + 3) (5,000)
Amount taxed under salary(11,500) 3,000