Do I Get Tax Benefits on Perquisites for Buying ESOPs from Previous Company?

Introduction: The taxation on perquisites, including Employee Stock Option Plans (ESOPs), has become a grey area in recent tax regulations. In this article, we will explore the specific tax implications of perquisites, including ESOPs, and provide clarity on whether you can receive tax benefits.

TDS on Perquisites or Benefits

The Tax at Source (TDS) clause mandates that those in charge of providing any advantages or perks to residents must withhold tax at the source, amounting to 10% of the value of such benefits and perquisites. This withholding is necessary even if the perk is not exchangeable for cash.

However, a fortunate exception exists if the total value of the benefit or perk for the financial year does not exceed 20,000 rupees. In this case, the withholding may not be necessary. This new clause applies to any advantage or perk that results from the resident’s professional or commercial activities.

Clarifications from Circular No. 12 of 2022

As of June 16, 2022, the Central Board of Direct Taxes (CBDT) provided detailed clarifications on common queries related to the new TDS on perquisites. Here are the five most frequently asked questions and their explanations.

1. Is it necessary for the Payer to confirm that the Perks received fall under Section 28(iv)?

No, the payer does not need to confirm this. Section 194R of the Indian Income Tax Act mandates that the person providing any benefit or perk must withhold tax at source at the rate of 10%. There is no obligation to determine if the payment is taxable in the recipient's hands or under another provision.

2. Does TDS still qualify as a tax deduction when benefits or perquisites are provided through capital assets?

Yes, TDS must be deducted whether the benefit is provided directly or through capital assets. Section 194R of the Indian Income Tax Act requires the deduction whether the perk is reimbursable or not.

3. Do sales discounts, cash discounts, and rebates fall under the purview of Section 194R for TDS calculation?

No, these do not fall under the purview of Section 194R. While they can be considered a benefit, these discounts are excluded from the scope of TDS as their valuation can be complex and time-consuming.

4. What are the benefit/perquisite valuation rules?

The value of benefits or perquisites must be based on the price charged by the company to its consumers for such items, if it has been manufactured and then issued.

5. What about TDS collection/payment if the benefit is provided in kind or cash, but not enough cash is given to pay the TDS?

When benefits are provided in kind, the recipient must ensure that there are funds available to pay the TDS and must inform the provider of the benefits/perquisites about this situation in advance.

Conclusion

Understanding the tax implications of perquisites is crucial for any individual or business. In the case of Employee Stock Option Plans (ESOPs), the taxation on these benefits is determined by the TDS clause. While there may be some exceptions, it is essential to comply with the tax regulations to avoid penalties and legal issues.

Frequently Asked Questions (FAQs)

Q1: Is TDS mandatory for ESOPs even if their value is below 20,000 rupees annually?
A1: No, TDS is not mandatory if the value of benefits or perks in a financial year is below 20,000 rupees. Q2: Can I receive a tax deduction when benefits are exchanged for capital assets?
A2: Yes, TDS is still mandatory when benefits are exchanged for capital assets. Q3: How are the sales discounts, cash discounts, and rebates treated in TDS calculation?
A3: Sales discounts, cash discounts, and rebates are excluded from the scope of TDS to avoid complexity.