{"id":1583,"date":"2026-08-06T08:43:27","date_gmt":"2026-08-06T04:13:27","guid":{"rendered":"https:\/\/caalokkumar.com\/my-writing\/?p=1583"},"modified":"2026-08-06T08:53:09","modified_gmt":"2026-08-06T04:23:09","slug":"esop-buyback-taxation-itat","status":"publish","type":"post","link":"https:\/\/caalokkumar.com\/my-writing\/esop-buyback-taxation-itat\/","title":{"rendered":"ESOP Buyback Taxation After Latest ITAT Rulings – When Can the Payout Be Treated as Capital Gains?"},"content":{"rendered":"\n

Form 16 Shows Salary, but Is ESOP Buyback Income Really Capital Gains? ESOP Buyback Taxation: 7 Key Lessons from the Latest Bengaluru ITAT Rulings<\/strong>
<\/h2>\n\n\n\n

ESOP buyback taxation<\/strong> has become an important issue for startup founders, senior executives and employees whose stock options are monetised before the underlying shares are issued.<\/p>\n\n\n\n

The central question is deceptively simple:<\/p>\n\n\n\n

When a company pays an employee for vested stock options, should the amount be taxed as salary, capital gains or, in some cases, treated as a non-taxable capital receipt?<\/p>\n\n\n\n

The answer does not depend merely on the fact that the options arose from employment. It depends on the precise legal event that generated the payment.<\/p>\n\n\n\n

An employee who exercises an option and receives shares is in a different position from an employee whose vested but unexercised options are repurchased. Both situations are also different from a one-time payment made merely to compensate an option holder for a fall in value while the options continue to remain with the employee.<\/p>\n\n\n\n

A Mint report published on 4 August 2026 discussed the Bengaluru Income Tax Appellate Tribunal\u2019s remand order in Shyam Beriwal v. DCIT<\/em>. Importantly, a subsequently reported decision in Pramod Kumar Jain v. DCIT<\/em> goes further and directly supports long-term capital-gains treatment for consideration received on repurchase of vested but unexercised stock options. (mint<\/a>)<\/p>\n\n\n\n

This article explains the distinction between these cases, the statutory framework and the precautions employees should take before reporting an ESOP payout in their income tax return.<\/p>\n\n\n\n

Table of Contents<\/strong><\/h2>\n\n\n\n
    \n
  1. Why the exact ESOP transaction matters<\/li>\n\n\n\n
  2. Normal tax treatment of employee stock options<\/li>\n\n\n\n
  3. What happened in Shyam Beriwal v. DCIT<\/li>\n\n\n\n
  4. Important limitation of the Shyam Beriwal order<\/li>\n\n\n\n
  5. Latest reported ruling in Pramod Kumar Jain<\/li>\n\n\n\n
  6. Why Form 16 and TDS are not conclusive<\/li>\n\n\n\n
  7. How Manjeet Singh Chawla differs<\/li>\n\n\n\n
  8. Possible relevance of Section 46A<\/li>\n\n\n\n
  9. Seven practical lessons for employees<\/li>\n\n\n\n
  10. Documents required to support the tax position<\/li>\n\n\n\n
  11. Frequently asked questions<\/li>\n\n\n\n
  12. Conclusion<\/li>\n<\/ol>\n\n\n\n
    \n\n\n\n

    Why the Exact ESOP Transaction Matters<\/strong><\/h2>\n\n\n\n

    The expression \u201cESOP payout\u201d is often used for several legally different transactions. That can lead to an incorrect tax conclusion.<\/p>\n\n\n\n

    The relevant event may be:<\/p>\n\n\n\n

    ESOP event<\/strong><\/td>Possible tax consequence<\/strong><\/td><\/tr>
    Grant of an option<\/td>Ordinarily no immediate perquisite taxation<\/td><\/tr>
    Vesting of an option<\/td>Employee acquires an exercisable right, but not necessarily the underlying shares<\/td><\/tr>
    Exercise followed by allotment or transfer of shares<\/td>Salary perquisite may arise under Section 17(2)(vi)<\/td><\/tr>
    Subsequent sale of allotted shares<\/td>Capital gains may arise<\/td><\/tr>
    Repurchase of vested but unexercised options<\/td>Latest reported ITAT ruling supports capital-gains treatment on its facts<\/td><\/tr>
    Compensation for diminution in value while options are retained<\/td>Judicial outcomes have differed; Karnataka and Delhi High Courts have treated such payments as capital receipts on their respective facts<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

    Therefore, ESOP buyback taxation cannot be decided merely from the words \u201cESOP\u201d, \u201cbuyback\u201d or \u201cemployee compensation\u201d appearing in an offer letter or Form 16<\/strong>.<\/p>\n\n\n\n

    The ESOP scheme, grant letter, vesting record, exercise history, repurchase agreement and legal effect of the transaction must be examined together.<\/p>\n\n\n\n

    \n\n\n\n

    Normal Tax Treatment of Employee Stock Options<\/strong><\/h2>\n\n\n\n

    Under Section 17(2)(vi) of the Income-tax Act, 1961, the value of specified securities or sweat equity shares allotted or transferred by an employer or former employer, either free of cost or at a concessional price, may be taxable as a salary perquisite.<\/p>\n\n\n\n

    The perquisite value is generally determined with reference to:<\/p>\n\n\n\n

    Fair market value on the date on which the option is exercised
    Less:<\/strong> Amount paid or recovered from the employee<\/p>\n\n\n\n

    The Income Tax Department\u2019s official ESOP guidance<\/a> explains that the first tax incidence ordinarily arises when the securities are allotted after exercise of the option. When those allotted securities are subsequently transferred, the resulting gain is considered under the capital-gains provisions. (Etds<\/a>)<\/p>\n\n\n\n

    The conventional tax sequence is therefore:<\/p>\n\n\n\n

    Stage 1: Exercise and allotment<\/strong><\/h3>\n\n\n\n

    The difference between the prescribed fair market value and the exercise price is generally taxed as a salary perquisite.<\/p>\n\n\n\n

    Stage 2: Sale of shares<\/strong><\/h3>\n\n\n\n

    The difference between the sale consideration and the prescribed cost of acquisition is considered under the capital-gains provisions.<\/p>\n\n\n\n

    The controversy arises where Stage 1 never occurs because the option is not exercised and no share is allotted. Instead, the company purchases or cancels the employee\u2019s contractual option right for consideration.<\/p>\n\n\n\n

    \n\n\n\n

    What Happened in Shyam Beriwal v. DCIT?<\/strong><\/h2>\n\n\n\n

    In Shyam Beriwal v. DCIT<\/em>, ITA No. 2331\/Bang\/2025, the dispute related to Assessment Year 2020-21.<\/p>\n\n\n\n

    An amount of \u20b939,74,477<\/strong> had been reflected by the employer in Form 16 and Form 26AS as salary, with tax deducted under Section 192. The taxpayer did not accept that classification and reported the transaction under the capital-gains provisions.<\/p>\n\n\n\n

    The Assessing Officer reopened the assessment and reclassified the amount as salary. The total assessed income and returned income remained the same because the dispute principally concerned the correct head of income.<\/p>\n\n\n\n

    When the taxpayer appealed, the appeal before the CIT(A) was delayed by 74 days. The CIT(A) refused to condone the delay and dismissed the appeal without deciding whether the amount was properly taxable as salary or capital gains.<\/p>\n\n\n\n

    The Bengaluru ITAT found that the taxpayer had shown sufficient cause. It observed that, in the case of an individual salaried taxpayer, insisting on a formal engagement letter, consultant correspondence or an affidavit from the earlier consultant was impractical. The delay was condoned and the matter was restored to the CIT(A) for a fresh decision on merits. The CIT(A) was also directed to consider the Karnataka High Court ruling in Manjeet Singh Chawla v. Deputy Commissioner of TDS<\/em>. (Indian Kanoon<\/a>)<\/p>\n\n\n\n

    Employees facing reassessment because of a difference between their return and Form 16 may require assistance with a faceless assessment and income-tax scrutiny response<\/a>, particularly where the dispute involves the legal character of the receipt rather than concealment of the amount.<\/p>\n\n\n\n

    \n\n\n\n

    Important Limitation: Shyam Beriwal Was Only a Remand Order<\/strong><\/h2>\n\n\n\n

    The Shyam Beriwal<\/em> decision must not be described as a final ruling that all ESOP buyback proceeds are taxable as capital gains.<\/p>\n\n\n\n

    The Tribunal decided only the procedural question of delay. It restored the substantive issue to the CIT(A). The appeal was allowed for statistical purposes, not by finally accepting the taxpayer\u2019s capital-gains computation.<\/p>\n\n\n\n

    There is also an important factual nuance in the Tribunal\u2019s narration.<\/p>\n\n\n\n

    Paragraph 2 of the order describes the receipt as arising from the buyback of vested stock options. Paragraph 4, however, records the taxpayer\u2019s explanation that Flipkart Group shares had already been allotted and were subsequently bought back. The taxpayer had reportedly divided the gain between long-term and short-term capital gains with reference to the dates of allotment and buyback. (Indian Kanoon<\/a>)<\/p>\n\n\n\n

    This apparent difference in terminology is material. A repurchase of vested but unexercised options is legally different from a buyback of shares already allotted after exercise.<\/p>\n\n\n\n

    Since the Tribunal did not decide the merits, the CIT(A) will have to examine the actual scheme documents, allotment records and transaction papers before determining the correct tax treatment.<\/p>\n\n\n\n

    \n\n\n\n

    Latest Reported Ruling in Pramod Kumar Jain Gives Direct Relief<\/strong><\/h2>\n\n\n\n

    The subsequently reported Bengaluru ITAT ruling in Pramod Kumar Jain v. DCIT<\/em>, ITA No. 3034\/Bang\/2025, addresses the taxation of vested but unexercised options more directly.<\/p>\n\n\n\n

    According to the reported facts:<\/p>\n\n\n\n