ESOP Taxability in case of death of Employee

[Nirrmit]

Hi, Any views that in case of death of employee how the perquisite value and perquisite tax on ESOP vested with him will be treated in hands of nominated member.
Will it be taxable at the time of exercise by nominated member or sale by nominated member and under which head of income

Thanks in advance for your answers  

[Ryan Vaz]

Issue Summary

In the event of an employees death, ESOPs (vested or accelerated) exercised by a nominee/legal heir are generally treated as "Income from Salaries" (Perquisite) in the hands of the deceased (filed by the legal heir), taxable at the time of exercise, while the subsequent sale of shares by the nominee triggers "Capital Gains".

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Applicable Law

1. Section 17(2)(vi) of the Income-tax Act, 1961: Defines the value of specified security/sweat equity shares allotted (ESOPs) as a "Perquisite" taxable under "Salaries."
2. Section 159 (Legal Representative): States that the legal representative constitutes the assessee for the deceased and is liable to pay any sum the deceased would have been liable to pay if they had not died.
3. Companies (Share Capital and Debentures) Rules, 2014: Mandates that in case of death, options granted to an employee vest in the legal heir/nominee.

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Short Practical Answer

The tax liability arises at two distinct stages:

1. At Exercise (Nominee exercises the option): The difference between the Fair Market Value (FMV) and the Exercise Price is treated as Perquisite income. Since the option was earned due to the deceaseds employment, companies typically deduct TDS u/s 192 treating it as Salary of the deceased. The legal heir must file the deceaseds tax return (as a Legal Representative) to report this income and claim the TDS credit.
2. At Sale (Nominee sells the shares): The profit (Sale Price minus FMV at exercise) is taxable as Capital Gains in the hands of the nominee/legal heir directly.

AI Summary

ESOP taxation on death: exercise taxed as perquisite of deceased; sale taxed as capital gains by the nominee. On an employee's death, exercise of vested ESOPs by the nominee/legal heir gives rise to a Perquisite (FMV minus exercise price) taxable as salary of the deceased and reported by the legal representative, with TDS typically deducted by the employer; a later sale of the shares by the nominee results in Capital Gains (sale price minus FMV at exercise) taxable in the hands of the nominee/legal heir.