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August 2018


Recent ITAT Order on TDS Administration in connection with Exercise of ESOPs – Timing of Chargeability, Recovery/ Deduction and Deposit of TDS

  1. Background

1.1    Out of many stages of employee stock options (“ESOPs”/ “Options”), exercise of Options results in allotment or transfer of underlying shares to the eligible employee and is the first taxable event in the hands of such employee. This is so irrespective of whether the ESOP implementing company (“Company”) is listed or unlisted in India. This tax is popularly known as ESOP perquisite tax and is administered by the Company by way of tax deduction at source (“TDS”) from the pay-roll or is recovered separately in connection with exercise of Options.


1.2    From a principle perspective, the aforesaid aspects are presumably not unknown to all concerned, particularly the tax administrators of a Company. However, from practical tax administration point of view, there could be differences in practice by Companies. In the process of exercise, there are few dates relating to necessary action items which often confuses as to determination of date of TDS and subsequently, impacts the date of deposit with the Government.


1.3    Recently, Hon’ble Bench of Income Tax Appellate Tribunal (“ITAT”), Hyderabad in the case of Bharat Financial Inclusion Limited vide Order dated 3rd August 2018 upheld that the TDS liability of a Company arises only when underlying shares are allotted post satisfaction of all conditions of exercise (including the payment of ESOP perquisite tax if required under the relevant ESOP Plan) by the concerned employee while negating the tax department’s view that TDS liability arises when an employee submits the exercise application or simply, when he exercises.

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