Answer

1. F

   Facts

   ESOP (Employee Stock Option Plan) is taxed TWICE. First at exercise: the difference between fair market value and exercise price is taxable as salary perquisite, employer deducts TDS. Second at sale: the gain from sale of shares over FMV at exercise date is capital gains. Most ESOP holders know neither event and are stunned by a large TDS or tax demand.

2. P

   Provisions and law

   • Sec 17(1)(d) (old 17(2)(vi))
   • Sec 392 (old 192)
   • Sec 196 (old 111A)
   • Sec 198 (old 112A)
3. A

   Analysis

   The two-event ESOP tax explained step by step: Example: ESOP exercise price = ₹100. Company listed, FMV on exercise date = ₹800. You exercise 1,000 options. Perquisite = (₹800 − ₹100) × 1,000 = ₹7,00,000. This is SALARY INCOME. TDS deducted by employer at 30% (if your slab is 30%) = ₹2,10,000. You've paid ₹2.1L in TDS from your salary. Cost of shares: ₹800 × 1,000 = ₹8,00,000 (FMV at exercise = cost). You then sell shares 14 months later at ₹1,200. Capital gains: (₹1,200 − ₹800) × 1,000 = ₹4,00,000. LTCG at 12.5% (above ₹1.25L) = (₹4L − ₹1.25L) × 12.5% = ₹34,375. Cost of acquisition for CG purposes: For ESOP: cost of acquisition = FMV on the date of exercise (not exercise price paid to employer). This is because the perquisite tax was paid on the FMV-exercise price difference. The remaining amount (FMV at exercise) is your actual cost for CG calculation.

4. C

   Conclusion

   1. 1Identify all ESOP grants: company, exercise price, vesting schedule, expiry date
   2. 2On exercise: compute perquisite = (FMV on exercise date − exercise price) × shares exercised
   3. 3Employer will deduct TDS on perquisite, confirm amount deducted appears in Form 130 (old Form 16) Part B
   4. 4Cost of acquisition for future CG = FMV on exercise date (not exercise price)
   5. 5Track holding period from exercise date, 12 months for LTCG on listed shares
   6. 6On sale: compute CG = sale price − FMV at exercise. LTCG or STCG based on holding period

General guidance from TaxSavvy’s library of money processes. Laws change; your Savvy confirms the answer on your exact case before anything is filed.