If the following conditions are satisfied, then value of sweat equity shares will be taxable in the hands of employee in the year in which the shares are allotted or transferred to employees.
(i) The security involved is either specified security or sweat equity shares.
(ii) Such security is allotted or transferred on or after 1st April 2009.
(iii) Such security is allotted to the employee (directly or indirectly) either free of cost or at a concessional rate.
Specified security includes
a. shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate
b. derivative
c. units or any other instrument issued by any collective investment scheme to the investors in such schemes
d. Government securities
e. such other instruments as may be declared by the Central Government to be securities
f. rights or interests in securities;
Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
Calculation of taxable amount:-
Taxable amount = Fair market value of such securities on the date of exercising option Less Amount actually paid by the employee
Calculation of Fair market value
Quoted shares:-
Quoted in one exchange – average of opening price and closing price
Quoted in more than one exchange – average of opening price and closing price in the stock exchange in which highest volume is traded
If the share is not traded in any stock exchange on the date of exercising of option, then the closing price on any stock exchange on a date closest to the date of exercising of option will be taken as fair market value.
Unquoted shares:-
The fair market value shall be the value determined by a merchant banker on the date of exercising of option or any date earlier than such date, not being a date which is more than 180 days earlier than the date of exercising of option.
Other Points:-
For calculating capital gain in case of sale of such shares by the employee, fair market value used for calculating taxable sweat equity shares amount is taken as the cost of acquisition of such shares.
Capital Gain on Transfer of Shares/Security by an Employee Received as Stock Option/Sweat Equity Plan
At time of allotment
If the following conditions are satisfied, then value of sweat equity shares will be taxable in the hands of employee under head “Salary” in the year in which the shares are allotted or transferred to employees.
(i) The security involved is either specified security or sweat equity shares.
(ii) Such security is allotted or transferred on or after 1st April 2009.
(iii) Such security is allotted to the employee (directly or indirectly) either free of cost or at a concessional rate.
For more read here – Sweat Equity Shares
At time of sale of such shares/security
Capital gains is taxable in hands of employee in year in which shares/securities are transferred. Cost of acquisition will be as follows-
- if shares are allotted after 31st March, 2009 then fair market value on date of exercise of option
- if shares are allotted on or before 31st March, 2009 but after 31st March, 2007 then fair market value on date of vesting of option
- if shares are alloted on or before 31st March, 2007 then the amount actually paid to acquire shares.
Also Read – Capital Gain on sale of Equity Shares – LTCG & STCG
