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No FBT on nominated directors' Esops
December, 25th 2007
The finance ministry has decided to exempt companies from paying fringe benefit tax on employee stock options issued to non-executive directors. This comes even as the debate on whether non-executive or nominated directors can exercise their stock options is yet to be settled.

It may be recalled that the controversy broke out when two Life Insurance Corporation nominees on the Larsen and Toubro board decided to exercise their stock option in March, soon after FBT on employee stock option plan was proposed in the Budget and made applicable from April 1, 2007. The government has now clarified that companies who give stock option plans to non-executive directors will not have to pay fringe benefit tax (FBT) on them.

According to the Central Board of Direct Taxes, benefit arising out of Esop issued to non-employees will not be liable to FBT. However, in such cases, the taxability of such benefits in the hands of the non-employees will be determined in accordance with the existing law, it says.

Further, the circular has given a relief to those companies which purchase securities from the market and given them to employees. The expenditure incurred by a company on purchasing shares would be allowable as a deduction in computing its taxable income. A large number of listed companies opt for this route.

But, the companies allotting shares from their own share capital will not be able to claim it as a deduction, since no expenditure has been incurred. Subsequently, if the employer recovers the FBT from the employee, it will not be treated as his income.
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