Burdening your dreams
Get ready to shell out hefty amounts as FBT for your perks, including ESOPs, from next year.
The worst fears of people holding ESOPs (employee stock option schemes) have come true.
As it is, they have been reeling under the anxieties of an overstretched Dalal Street that could see a sharp correction.
To add to their woes, a government notification issued in the last week of October declared that ESOPs will now be charged a hefty 30 per cent fringe benefit tax (FBT) in addition to a surcharge.
What’s worse, in case the employer does not pay this tax, the employee may have to shell out a large sum even before selling his shares.
Does this sound the death knell for ESOPs? Says Sanjiv Agrawal, Partner, Ernst & Young: “ESOPs hold a lot of attraction for employees compared to other perks, since the monetary benefit under stock options can be very substantial in these times of stock market boom.”
Options Before Employees |
How you can maximise your gains from ESOPs.
|
But Section 115 WKA of the I-T Act gives employers the right to recover FBT from employees.
For listed companies (there are close to 7,000), FBT will be calculated as the difference between the fair market value (FMV) and the price at which companies issue the ESOP to employees.
The FMV is the average of the opening and the closing price of the share on the vesting date.
To illustrate the rules, let’s assume Dhiraj Mansukhani is an employee in a company that has granted him the option of buying 1,000 shares at Rs 100 per share on October 1, 2007 (See How FBT Is Calculated).
If Mansukhani were to exercise his right on the vesting date (March 1, 2008 with each share priced at Rs 500), he will be liable to pay the FBT in March 2008, which works out to a whopping Rs 67,980 plus the applicable surcharge.
There’s another catch, though. If Mansukhani sells his shares in less than a year after allotment, he would have to pay short-term capital gains tax at the rate of 10 per cent of the amount, which works out as the difference between the fair market value on the date of vesting and the actual sale price.
Experts say despite the FBT, ESOPs will continue to be an attractive proposition vis-à-vis other perks, since the stock option does not have much impact on the profit and loss account of companies.
So, ESOPs are here to stay and if you have the right strategy, chances are that you might make a killing.
How FBT Is Calculated
Eight simple steps to work out your FBT burden. Consider this example:
- Stock options granted on October 1, 2007 = 1,000 shares @ Rs 100 per share
- Market price on the date of grant = Rs 200 per share
- Stock options vested on March 1, 2008 = 500 shares out of the 1,000 shares
- Market price on the vesting date = Rs 500 per share
- Fair market value as on March 1, 2008 = 500 shares X 500 per share = Rs 2,50,000
- Exercise price as on October 1, 2007 = 500 shares X 100 per share = Rs 50,000
- Fringe benefit amount = Rs 2,50,000-Rs 50,000 = Rs 2,00,000
- FBT = 33.99% of Rs 2,00,000 = Rs 67,980
