Question ID : 44491

Funds received from start up- taxation in the hands of employee

Mr. A is an employee of M/s XYZ Private Limited. He has received some ESOP over the period of time during his employment with M/s XYZ Private Limited. Now, M/s XYZ Private Limited who were holding around 80% of stake in startup decided to exit from the startup and sell the whole stake. Due to the exit from this startup the valuation of M/s XYZ Private limited has gone down and board decided to compensate the ESOP holders. Board decided to pay say Rs. 100,000/- per ESOP to its employee as compensation for loss in valuation before and after the exit from startup. Que.: What will be taxation of this receipt in the hands of employee?

If shares were not allotted to employees under ESOP then no tax would have deducted from employee as perquisite. Consequently, if employee is compensated for the ESOP, it means he is in receipt of consideration for right in the share and accordingly whole consideration will be taxed considering the period of holding i.er., more than 3 years as LTCG & if it is less then STCG. Cost would be 0. Further, if ESOP shares are allotted to employee, share value on which perquisite was calculated would be the cost of acquisition & allotment date would be the date of acquisition. Funds received would be the sale value (presumed that 50CA value is less than the amount received from company i.er., 1,00,000/-) and capital gains will be computed considering the period of holding as 24 months.