ESOPs Abroad: Use Exercise Date FMV as Cost for Capital Gains
By ThePip Desk
Non-residents can use ESOP exercise-date Fair Market Value as cost for capital gains, per a key ITAT Mumbai ruling. Learn how this impacts your tax.
If you’ve ever thought about selling shares from your Employee Stock Option Plan (ESOP) after moving abroad, a recent ruling by the Income Tax Appellate Tribunal (ITAT) in Mumbai could be important for you.
The tribunal has confirmed that the Fair Market Value (FMV) of your shares on the date you exercise your options can be treated as their cost of acquisition, even if you weren’t taxed on the ESOP benefit in India.
Understanding One Employee’s Case
This significant decision came from the case of Rajesh R. Hemrajani, a non-resident and UK tax resident. He was employed by the UK branch of L&T Infotech Ltd. and had exercised 1,540 ESOPs at just ₹1 per share.
Mr. Hemrajani later sold these shares for approximately ₹25.99 lakh. When calculating his capital gains, he used the shares’ FMV on the exercise date, which was about ₹1,754 per share, as their cost.
Key Numbers from the Case
- Employee: Rajesh R. Hemrajani
- Shares Exercised: 1,540 ESOPs
- Exercise Price: ₹1 per share
- Sale Price: Approximately ₹25.99 lakh
- FMV on Exercise Date: Approximately ₹1,753.58 per share
- Resulting Calculation: Short-term capital loss of ₹1,00,650
The Tax Department’s Stance
The tax department challenged Mr. Hemrajani’s calculation. Their argument was that since the ESOP benefit was not taxed in India – because he was a non-resident and performed his services outside India – the cost of acquisition should only be the ₹1 per share he actually paid to exercise the options.
This would have meant a much higher capital gain for him, but Mr. Hemrajani argued that Section 49(2AA) of the Income-tax Act, which covers ESOPs, allows for the FMV to be considered.
What the Mumbai ITAT Decided
The Mumbai ITAT sided with Mr. Hemrajani. They directed the assessing officer to recompute the capital gains by using the FMV on the exercise date as the actual cost of acquisition for his shares.
This ruling clarifies that the FMV at the time of exercising your ESOPs can indeed be the cost of acquisition, even if your ESOP perquisite was not subject to Indian tax laws due to your non-resident status.