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Tax liability on ESOP
August, 04th 2008

I am a bank employee and I was allotted shares under ESOP, which I accepted after paying the grant price. I gifted the same to my wife two months later.

She sold the same through an authorised broker and realised a sum of Rs 4 lakh.

What will be the tax liability and will it be taxable in my hands or in the hands of my wife?

Who has to hold the shares for at least one year to avoid tax on capital gains payable, if any? Bhaskar

From your query it is not clear whether the employee stock option suffered fringe benefit tax in the hands of your employer.

If fringe benefit tax has been paid by your employer on the difference between the market value and grant price, the market value of the share will be taken as the cost of acquisition in your hands.

If it were not so i.e. if the stock options were exercised prior to the fringe benefit tax being made applicable on such options, the cost of acquisition would be the grant price at which your employer made the options available to you.

Your wifes cost of acquisition will be the cost of acquisition, which will be applicable to you.

Since you have gifted the shares to your wife, the capital gains will be assessable in your hands by virtue of the clubbing provisions in Section 64(1).

The shares must have been held by you and your wife in the aggregate for a period exceeding one year, so that the gain would be treated as long term.

If your aggregate holding is less than or equal to one year, the gain will be short term. If the sale is through a recognised stock exchange and if the shares have been held in the aggregate for a period exceeding 12 months, the long-term capital gain would be exempt under Section 10(38).

I am working in a private company and I am an income tax assessee.

If I do my higher studies while continuing in my service, will I be eligible for any income tax benefit? Mallikarjun

No deduction can be claimed by you in respect of the expenditure incurred by you on the fees paid for your higher education.

Section 80-C permits a claim for deduction in respect of tuition fees paid (excluding any payment towards any development fees or donation or payment of similar nature), whether at the time of admission or thereafter to any university, college, school or other educational institutions situated within India for the purpose of full time education of any two children of an individual.

It can be seen that this section only allows a deduction where the fees is paid for the benefit of the childrens education and not for the education of oneself.

The gross annual salary of my son is more than Rs 10 lakh and he is paying a rent of more than Rs 10,000 every month.

Is Section 44AB and Section 194-I applicable to him in this case? Sridhara Murthy

Your son will not be required to deduct tax at source under Section 194-I of the Act.

Section 44AB requires an audit to be done under that Section if the sales, turnover or gross receipts exceeds Rs 40 lakh in case of a person carrying on business or exceeds Rs 10 lakh in case of a person carrying on profession.

Section 194-I requires tax to be deducted at source if the rent exceeds Rs 1.2 lakh an annum and this Section would require every person other than an individual or HUF to deduct tax at source, while in case of an individual or HUF would require tax to be deducted, only if such individual or HUF were subject to audit under Section 44AB of the Income Tax Act in the immediate preceding previous year by virtue of exceeding the limits specified under Section 44AB.

In your sons case, your son is a salaried employee and therefore would not be subject to tax audit under Section 44AB, which would apply only to persons carrying on a business or profession.

Therefore, he would also not be required to deduct tax at source under Section 194-I of the Act.

A plot of 400 sq yards at the rate of Rs 4,300 a sq yard was purchased in the name of my wife in March 2006 and a sum of around Rs 1.50 lakh was paid for registering it.

My wife took a personal loan of Rs 3.50 lakh and she is paying an EMI of Rs 10,000 a month.

I had also taken two personal loans of Rs 3.50 lakh and Rs 5 lakh.

We now want to sell this plot. What is the procedure for calculating the long-term capital gains on sale of the plot, taking into the account the personal loan?

How can we avoid the tax on long-term capital gains? Ashu

The capital gains will be computed by reducing from the full value of consideration the cost of acquisition as well as the sum paid for registering the plot in your wifes name.

The EMIs paid on your personal loan or on the personal loan of your wife will not in any way go to reduce the capital gains.

If the gain is long term i.e. if the plot has been held for a period exceeding 36 months, the indexed cost of acquisition, which will include the registration cost, can be reduced in computing the capital gains.

You may consider reinvesting the proceeds in a residential house to claim exemption under Section 54F or invest in bonds of the REC or the NHAI to claim exemption under Section 54EC, subject to satisfying the other conditions stipulated in those Sections.


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