ITAT rules Flipkart ESOP buyback is capital gain, not salary

The Story in Brief

Livemint reports that the Bengaluru Income Tax Appellate Tribunal (ITAT) held that Rs 2.33 crore received by a Flipkart executive for repurchasing vested but unexercised employee stock options (ESOPs) should be taxed as long-term capital gains (LTCG) at 12.5%, not as salary perquisite at slab rates above 30%. The tribunal reasoned that until an employee exercises the option and receives shares, they hold only a contractual right, a capital asset, not a salary benefit.

Under Section 17(2)(vi), the ESOP benefit is taxed as salary only when shares are actually allotted. Experts caution that this does not give employees a free choice: the company must structure the transaction as a repurchase and cancellation of options. The tax department could also invoke GAAR or specific buyback rules to challenge the arrangement.