The Income Tax Appellate Tribunal (ITAT) in Bengaluru has established a significant precedent for employee stock option taxation. According to reports from The Economic Times, the tribunal held that vested employee stock options do not become taxable as salary perquisites until they are exercised. The bench ruled that gains arising from the repurchase of unexercised options are taxable as long-term capital gains (LTCG) and cannot be treated as salary perquisites. This ruling provides clarity on the tax treatment of employee stock options and establishes that such gains are capital in nature rather than salary income.
The ruling was applied to a senior executive at ecommerce firm Flipkart, Pramod Kumar Jain, who received ₹2.33 crore after Flipkart Pvt Ltd, Singapore, repurchased 2,653 vested stock options he held. As reported by The Economic Times, Jain declared a gross salary of ₹1.90 crore and long-term capital gains of ₹2.43 crore in his return. The assessing officer treated the entire ₹2.33 crore received on the repurchase as a perquisite under Section 17(2) of the Income Tax Act, holding it taxable as salary income rather than LTCG. The case demonstrates how the tribunal's interpretation of Section 17(2)(vi) will impact future employee stock option taxation, particularly for companies offering such benefits to their executives.
The ITAT bench, comprising judicial member Sandeep Singh Karhail and accountant member Balakrishnan S, established that since Jain never exercised the options and no shares were allotted to him, the options could not be treated as 'specified securities' for taxation as perquisites under Section 17(2)(vi) of the Income Tax Act. According to The Economic Times, the tribunal stated that taxability under this section arises only after the option is exercised. The bench held that the options represented a right to subscribe to shares at a future date and were therefore capital assets. This classification reinforces that employee stock options are not salary perquisites but represent capital gains when repurchased by the company.
This ruling establishes a clear legal precedent for employee stock option taxation in India. As reported by The Economic Times, the ITAT held that the repurchase of those rights amounted to a transfer of the assets, reinforcing the capital gains treatment for unexercised options. The case demonstrates how the tribunal's interpretation of Section 17(2)(vi) will impact future employee stock option taxation, particularly for companies offering such benefits to their executives. This ruling provides much-needed clarity for both companies and employees regarding the tax treatment of employee stock options, ensuring that gains from repurchased unexercised options are treated as capital gains rather than salary income. The ruling comes as the Taxation and other laws (Amendment) Bill, 2026 was introduced in the Lok Sabha, which aims to reduce reporting requirements for foreign companies claiming tax holidays.
