ESOPs are taxable when you exercise the stock option and also when you sell them

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I am getting employee stock ownership plan (ESOP) shares from an India-listed company whose shares are listed on an Indian exchange, while I work for its UK sister concern. I used to work for the company that is offering the ESOP. Later it transferred me to the subsidiary company. Now the Indian company wants me to deposit perquisite tax for vesting ESOP. Under which head can I claim refund of perquisite tax deducted by the company, as I am not paying tax in India?

—Resham K.

In India, the benefits you receive from an employee stock option programme (ESOP) would be treated as taxable income in two instances—first, when you exercise the stock option, and second, when you sell the shares.

If the stock option exercised by you pertains to the period of your India employment, either partially or fully, the fair market value of the shares as on the date of exercise, reduced by the exercise price of the share, to the extent this benefit relates to the period of your India employment, will be treated as a taxable perquisite. The extent of taxability will also depend on your India tax residential status. If you did not qualify as a tax resident of India, and if you were subject to tax on this stock income in the UK as well, you may be able to claim relief from double taxation under the Double Taxation Avoidance Agreement between India and the UK. In case you qualify for this relief, you may be able to claim a refund of any excess tax withheld by the Indian employer by filing a claim in your India tax return. If and when you sell the shares obtained under the ESOP, you may be liable to pay tax on the resultant capital gains arising from the sale. If you held the shares for 12 months or more before selling them, and you have paid Securities Transaction Tax on the sale, the long-term capital gains arising from the sale will be exempt from tax if shares are sold prior to 31 March 2018. If the shares are sold post 31 March 2018, then the long-term capital gains (for shares held for 12 months or more) in excess of Rs1 lakh (assuming you have no other long-term capital gains) will be taxable at 10% (plus applicable cess and surcharge).

There is a vacant plot that is in my mother’s name. We want to sell it and buy agricultural land for the whole amount received from the sale. Does this sale amount get exemption from Long-term Capital Gain (LTCG) tax as we are investing all of the proceeds to buy new property? Do we have to file a tax return to avoid any tax related problems in future?

—Varun Kumar A.

Assuming that the plot of land owned by your mother, and being sold, is not agricultural land the sale would trigger taxes on the resultant capital gains, the gains are taxable as short-term capital gains, at the slab rates applicable to your mother, if she held the land for 24 months or less between the dates of purchase and sale. Else, the gains are taxable as long-term capital gains (LTCG) and taxed at 20% (plus applicable cess and surcharge). The re-investment of the resultant LTCG in the purchase of agricultural land would not qualify for a tax exemption. However, the LTCG can be claimed exempt from tax by investing the gains in specified bonds notified by the central government within 6 months from the sale of the property or by re-investing the sales proceeds in a residential property in India subject to satisfaction of other conditions. Filing a tax return will depend on various factors such as your mother’s age, total income, and taxes deducted at source. Considering that the sale of land would be reported by the registrar in the Annual Information Return (AIR), your mother should file a tax return pertaining to the year of sale of the asset within the statutory due date.

A company based in Dubai is purchasing material from Africa. I come into the picture as an agent or mediator for the buyer. It is a perfectly legitimate transaction. However, I am not a registered broker or agent in India for the commodity. If I receive the commission in my Indian bank account, it may raise questions, as the inflow of money will get noticed. Is there a procedure that I can follow to receive the commission without getting into trouble with the tax authorities?

—Name withheld on request

Presuming that you qualify as an ordinary tax resident of India, your global income is liable to tax in India, including any commission you earn for facilitating trade outside India. This would be irrespective of the place of receipt of such commission. Such income would be considered as business income and is subject to tax in India, net of admissible deductions.  You are obligated to file a return of income within the due, with adequate disclosures made in the return form. It is advisable to check if you are liable to tax registration in India (for example, for GST and others) and maintain adequate documentation (including books of account) in connection with source and nature of this income, in case such information is requested by the tax authorities. Considering the limited facts available, we have refrained from commenting on any regulations under Foreign Exchange Management Act, or others, and withholding tax or other aspects (for example, having books of account audited).

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.