Post #20: Employee Share Scheme - Disposal before Free Right

Q. If shares are issued with restriction under an Employee Share Scheme (ESS) and employee disposes off the shares before the date of free right, what impact will it have?

A. If shares are issued with restriction on their transfer by employer, following provision of law shall apply

a) The amount to be charged to tax under Salary of the employee shall be computed as follows:

FMV of Shares on the Date of disposal
Les: Consideration paid by employee for option, right or shares
Amount Chargeable to Salary
[Section 14(3)]

b) Since there has been disposal of shares, hence, capital gains u/s 37 or 37A on their sale need to be computed as follows:

Consideration Recieved
Less:Cost
C.Gain/Loss

In this case consideration recieved shall be taken equal to the FMV of the shares on the date of disposal and cost equal to sum of consideration paid for option, right, or shares and the amount charged under Salary for shares [Section 14(4)]. Thus, in this situation gain will be zero. But, computation thereof must be shown in the paper.