India ITAT Mumbai Rules Non-Resident ESOP Fair Value is Acquisition Cost
India's Income Tax Appellate Tribunal (ITAT) Mumbai has clarified that the fair market value (FMV) of employee stock option plan (ESOP) shares at exercise can be the acquisition cost for non-residents. This applies even if the ESOP benefit was not taxed in India, providing tax clarity.
ITAT Clarifies Acquisition Cost
The Income Tax Appellate Tribunal (ITAT) Mumbai bench ruled on a case involving Rajesh R. Hemrajani, a UK tax resident employed by L&T Infotech Ltd.'s UK branch. Hemrajani exercised 1,540 Employee Stock Option Plan (ESOP) shares at ₹1 per share. The shares' Fair Market Value (FMV) on the exercise date was approximately ₹1,753.58 per share. He later sold these shares for about ₹25.99 lakh.
Tax Department Disputed FMV
Hemrajani calculated his capital gains using the exercise-date FMV as the acquisition cost. This resulted in a short-term capital loss of ₹1,00,650. India's tax department disputed this treatment. They argued the cost should be limited to the ₹1 per share exercise price.
The department contended Hemrajani's ESOP benefit was not taxable in India, as his employment services were rendered outside India.
No Requirement for Prior Taxability
The ITAT Mumbai, however, allowed Hemrajani's appeal, directing a recomputation of capital gains. The tribunal focused on Section 49(2AA) of the Income-tax Act. This provision defines the acquisition cost of ESOP shares as the FMV taken into account for perquisite valuation. The ITAT held that the provision does not require the FMV to have been actually subjected to tax in India.
This ruling provides important clarity for non-resident Indians (NRIs) and expatriates holding ESOPs from Indian companies. It establishes a precedent for calculating capital gains on such share sales. This could reduce tax liabilities by allowing a higher acquisition cost, even if the ESOP perquisite was not taxed. The decision impacts wealth management and tax planning for non-residents with financial interests in India.
This article is journalism, not investment advice; consult a licensed professional before making financial decisions. Market data is indicative, may be delayed, and should be verified with your broker or exchange before use.
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