The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) delivered a verdict that will affect how ESOP buyback payments are taxed in India.
The case involved Pramod Kumar Jain, a former Flipkart employee, who received â‚ą2.33 crore when the company bought back his vested ESOPs before he exercised them.
Jain filed his return treating the amount as long‑term capital gains (LTCG). The Income Tax Department, however, argued it was a salary perquisite under Section 17(2)(vi) because it was linked to his employment.
The employee argued that since the options had not been exercised and no shares were allotted, the payment should be seen as a capital asset and taxed accordingly.
The ITAT agreed with Jain, stating that Section 17(2)(vi) applies only when the option is exercised and shares are transferred. Without a specified security, the perquisite cannot be taxed as salary.
This ruling is not a Supreme Court decision, but it creates a strong precedent. Taxpayers with similar ESOP buybacks can use it as a basis, though the Department may appeal to the Karnataka High Court.
ESOP taxation normally follows two stages: when you exercise the option, the spread between FMV and purchase price is a salary perquisite; later, any profit or loss on the shares is a capital gain.
For returns: if the options were never exercised, do not report the buyback as salary, even if Form‑16 shows it. The holding period for capital gains starts from the grant date. If options were exercised, report the exercise benefit as salary; later sales are taxed as capital gains, using the FMV at exercise as the cost.
Employees should keep all documents—grant letters, vesting schedules, buyback agreements, and proof that options were not exercised—to support their tax position. These records were crucial in Jain’s case.