Industry body FICCI on Sunday asked the Finance Ministry to amend rules for taxing ESOPs in line with SEBI guidelines, as the current provisions are leading to increased tax burden that may make it difficult to retain talent.

Employee Stock Option Plans (ESOPs) are the remuneration given to employees in the form of shares, primarily of the employer company. A tax is imposed on ESOPs on the basis of fair market value of the specified security on the date when the option is exercised by the assessee, reduced by the amount paid by him in respect of such security.

However, SEBI guidelines provide for fair market value of a stock option as the market price prevalent on the grant date, not to be subsequently adjusted for changes in the price of the underlying stock.

Calling for amending the tax rules as per the SEBI guidelines, FICCI in a letter to the Finance Ministry said, “The anomalous tax treatment of ESOPs arising out of the inconsistent determination of perquisite value in respect of shares allotted to employees...vis-a-vis SEBI guidelines, is resulting in ESOPs being taxed at a price higher than the concession/discount given by the employer,” FICCI said.

SEBI norms also spell out how the deferred compensation would be treated in case ESOPs are granted free of cost or at concessional rate.

A statement issued by the chamber said,”FICCI has suggested that... employees be taxed only on the concession or discount actually given by the employer at the time of grant and not on notional perquisite value determined with reference to the FMV on the date on which the option is exercised,” the industry body said.

Regarding any subsequent gain that may come to employees due to favourable market movements, it said that such profits could be subject to capital gains tax on actual sale of shares without affecting the revenue.

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