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Watchout when to sell your stock option to avoid higher taxes
September, 01st 2008

You could end up paying a higher tax on selling your stock option granted by the employer by miscalculating the duration of holding of these shares if you ignore a recent tribunal order, clarifying on such calculation.

Dismissing the appeal of a professional who was given stocks by his US-based employer, the tribunal said that the duration of holding the company stocks will be calculated from the date when the employee has the right to excercise the stock option, that is a right on the shares to purchase them or sell them which could be later than date when the stock option was granted.

Clarifying on the calculation of the duration, the Bangalore bench of Income Tax Appellate Tribunal said, " till the shares are allotted, an assessee is not a subscriber of the shares of the company and is not considered a member therefore, he could not have trasnsferred any shares prior to the date on which he became a member".

The employee of the US-based software company Winphoria Networks had been taxed at the rate of 30 per cent as the duration of holding the stocks by him was less than 12 months. As per the tax laws, holding a stock option given as an option for a period of less than 12 months attracts a tax rate of 30 per cent whereas holding shares for a period of more than 12 months could reduce the tax burden by 10 per cent.

Besides, the bone of contention between the employer and the tax officials was that the employer considered holding the shares from the date it was vested on him that is the day when the option was granted, while the Tax department took into account the the period of holding from the day the assessee became the shareholder or actually purchased the shares.

The US-based software company Winphoria Networks in this case had announced an Incentive Stock Option scheme for Winphoria India employees through which the assessee was granted the right to purchase 1.25 lakh shares of the company but could excercise the option or purchase of only 25 per cent shares at that time. The employee could own the rest of the shares after a year and that too only 6.25 per cent of the total shares in each quarter as per the agreement between the employer and the company.

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