Repurchase Of Stock Options: Perquisite v/s Capital Gains

1. Introduction

1.1 The taxation of employee stock options has long been a subject of debate under the Income-tax Act, 1961 ("ITA"), particularly in situations where the transaction does not follow the conventional lifecycle of grant, vesting, exercise and subsequent sale of shares. One such issue relates to the tax treatment of consideration received by an employee upon the repurchase or cancellation of vested but unexercised stock options. While the taxpayers contend that vested but unexercised stock options constitute an independent capital asset, any consideration received on their repurchase ought to be taxed under the head ‘Capital Gains’, the Revenue seeks to tax such receipt as a perquisite under the head ’Salaries’.