Buyback of shares issued at discounted rate

[Common Issues]

An assessee got shares at discounted rate from its employer two years back. Now company (employer) and buy back the sahres from the employee at market rate.

Now, whether, profit earned by the employee assesse is taxable under the provisions of Income Tax? If yes, would it be taxable as Salary to capital gain.

Further, whether the employee would be eligible for exemption under section 54F or any other provisions available for investing profit arising out of long term capital gains?

[Surender Gupta]

See section 17(2) of Income Tax Act, 1961. which specifies that any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government shall not be treated as perquisite.

Whether the shares were issued to the employees under the scheme.

Further, if the shares are listed and fulfill the conditions of section- 10(38)), the profit arising therefrom shall be exempted.

If the same is not exempted u/s 10(38), in my view certainly the same would qualify for exemption in view of section 54F of the Income Tax Act, 1961.

AI Summary

Employee stock option taxation: buyback gains treated as capital gains if not a perquisite, with possible exemptions.
Taxability of an employee's profit on company buyback of discounted shares turns on whether the shares were issued under a compliant employee stock option scheme (in which case issuance is not a perquisite) and on whether the shares are listed and satisfy the listed-securities exemption; if that exemption is unavailable, the proceeds are treated as capital gains and may qualify for the statutory long-term capital gains reinvestment exemption subject to conditions.