Increasing numbers of Indian startups and businesses are giving staff members stock options. Having a piece of the company you work for sounds fascinating! Many people, meanwhile, overlook one crucial point: stock option tax. Should you have stock options, you should be aware of their tax treatment.
Describe Stock Options Here
ESOPs—employee stock option plans—are another name for stock options. Companies present them to staff members either as a bonus or as part of their pay. It entitles you to purchase company shares at a set future price.
Assume your company offers you 1,000 shares for ₹100 apiece. Should the share price drop ₹300 later, you still pay ₹100. You therefore profit, but the profit comes with stock option tax.
Stock Option Tax Applies When?
Stock option taxes in India apply two times:
- When You Use Your Option
You pay the fixed price for the shares.
Considered taxable income is the variation between the fixed and market prices.
Taxed as perquisite under salary.
For instance, the ₹200 profit each share taxes as salary if the market price is ₹300 and your option price is ₹100. - You Sell the Shares
Should you sell your shares later, you could have a capital gain.
The length of time you owned the shares determines how taxed this gain is.
Two varieties exist:
- Taxed at 15%, short-term capital gain (STCG) for listed shares—if held less than 12 months.
- Long-term capital gain (LTCG) taxed at 10% following ₹1 lakh exemption if held for more than 12 months.
- Taxed at 15%, short-term capital gain (STCG) for listed shares—if held less than 12 months.
As a result, stock option tax is due upon both exercise and sale.
Strategic Management of Stock Option Tax
These ideas help you to manage stock option tax sensibly:
- Plan depending on your tax slab; do not exercise all options simultaneously.
- Should the company be private, selling shares could take time; think about that.
- Track dates and costs to maximize tax planning.
- See a tax specialist’s guidance if necessary.
Startups’ ESO Tax
Sometimes qualified startups are granted tax relief. Employees can defer paying taxes for five years or until they sell the shares or leave the company, whichever comes first. This advantage, however, only applies to acknowledged startups under DPIIT and requires adherence to particular guidelines.
Last Views
Although building wealth can be achieved with stock options, do not overlook the part related to stock option tax. Know when and how much tax you will pay. Little preparation will help you to enjoy the advantages and prevent surprises at tax season.