Gains from stock appreciation rights taxable

Picked from The Economic Times:

In a recent decision, the special bench of the Mumbai Income-Tax Appellate Tribunal (ITAT) has held that the amount received on redemption of stock appreciation rights (SAR) by an individual is taxable as salary. This is an important ruling, as it distinguishes the benefit arising from Sar vis-à-vis the benefit arising under an employee stock option plan (ESOP). The tax payer was an employee of an Indian company, which is part of the group of companies of a foreign multinational. During the assessment year 1998-99, he received a sum on account of redemption of SAR granted to him earlier by the foreign company, under a SAR scheme. The taxpayer was allotted SAR in respect of a specified number of shares of the foreign company at an agreed price, which normally reflected the market price as on the date of the grant. He could exercise the right to redeem the appreciation of these shares after one year but within a specified time period from the date of the grant. On redemption of SAR, the grantee was entitled to receive the excess of market price over the agreed grant price. It is pertinent to note that no shares were actually allotted to the tax payer and his benefit was confined to appreciation in value of the underlying shares. An issue arose whether the amount received on redemption of SAR was taxable as salary income.

Taxpayer’s contention:
The taxpayer contended that the amount received on the redemption was not taxable for various reasons, which inter alia include: SAR was allotted by the foreign company and not by his employer, i.e. the Indian company. As there was no employer-employee relationship with the foreign company, the grantor of SAR — the amount received on their redemption could not be taxed as ‘income from salaries’. Further, even if taxable, SAR could be taxed at the time of its grant. As SAR was granted at the market value of the shares, no benefit accrued to the taxpayer, and hence, no benefit could be taxed.

Tax authorities’ argument:
Tax authorities contended that the grant of SAR to the taxpayer was on account of his employment and any benefit from SAR, whether granted by employer or a foreign company, would be characterised as ‘income from salaries’. Further, there was no benefit when SAR was granted to the taxpayer and the benefit crystallised only in the year, in which it was actually redeemed.

Tribunal’s decision:
The tribunal held that the redemption of SAR is quite different in scope and its application as compared to an employee stock option. It has held that the redemption of SAR is an employment-related benefit, in the nature of deferred wages or bonus/incentive, received as a fruit of employment, and hence taxable as salary. Further, in case of SAR, the exact quantum of benefit or reward is ascertained at the point of time when SAR is redeemed and not when the same is granted. Current position Currently, the benefit arising under an Esop is taxable as fringe benefit tax (FBT) on the date, on which the options vest with the employee. FBT is payable by the employer at the time of the allotment or transfer of shares to the employee. In case of SAR, ent or transfer of shares, the above decision would have direct bearing on the employers and employees in respect of taxability of the benefit arising from SAR.

Claim LTA this year rather than next

If you are planning to put off your claim on the tax rebate on leave travel allowance (LTA) for next year or the year after, think again. Claiming the rebate in 2007-08, the current financial year, will be more beneficial. As the tax rate will effectively come down substantially from 2008-09, following the Budget hike in exemption limits and tax slabs, the tax incidence on your LTA will also be lower from next year. That means you save less too. If you don’t claim the tax benefit this year, you will pay 30% as tax on your LTA if your total income, including LTA, is more than Rs 2.5 lakh. Therefore, claiming the tax benefit will mean you save that amount.
However, next year, the tax incidence on your LTA portion will be only 10% if your income, including LTA, is between Rs 1.5 lakh and Rs 3 lakh and 20% if it is between Rs 3 lakh and Rs 5 lakh. It’s only if your income exceeds Rs 5 lakh that the tax rate becomes 30% on the portion of income above Rs 5 lakh. Income tax exemption on LTA can be claimed in any two years out of a block of four years specified by the I-T department. According to a tax expert, at present, the four specified years are 2006, 2007, 2008 and 2009. Out of these four years, you can claim the tax benefit in any two years. Normally, people tend to claim the tax benefit in the later part of the four-year period, assuming that their salary and LTA is likely to be higher in those years. This helps them to save more tax. As the tax rates will come down from 2008-09, the benefit of claiming income tax exemption on leave travel allowance will also be low. For instance, take a person who has an annual salary of Rs 4 lakh per annum (Rs 33,333 per month) and gets LTA of Rs 1 lakh every year. He can claim tax exemption on LTA in any two years out of the block of four years starting from 2006. Even if, he has claimed the income tax exemption on LTA in 2006-07, he can claim it again in 2007-08. But in that case, he cannot claim it for the next two years. If he decides not to claim the income tax exemption this year, he will have to pay tax of Rs 30,900 on the LTA of Rs 1 lakh. But, if he claims the benefit, he can save the amount. Of course, this will mean he can no longer claim the benefit next year, but the tax on his LTA next year would be only Rs 20,600. In effect, therefore, by taking the rebate this year rather than next year, he will make a net tax saving of Rs 10,300 over the two years. In fact, the benefit will be even higher in percentage terms if one’s annual income is lower, say in the range of Rs 2.5 lakh. Take a person with an annual taxable income of Rs 2.5 lakh and LTA benefit of Rs 50,000. The tax incidence on the LTA in 2007-08 would be Rs 15,450, which he can save if he claims the I-T exemption on that. But, in 2008-09, the tax incidence will be only Rs 5,150. Therefore, it is better to claim the tax benefit this year and pay tax next year.

SC rules that leave encashment shoul not be included in wages for PF calculation

Read the article at the Times of India.

In a significant ruling reducing the deductions on the salary sheet, the Supreme Court has held that the money got by an employee from encashing earned leave could not be taken as wages for calculation of provident fund (PF) contributions. Deciding a bunch of petitions in favour of the employees, a bench comprising Justices Arijit Pasayat and P Sathasivam rejected the stand of regional PF commissioner that the amount received on encashment of earned leave had to be taken into account for the purpose of calculating PF contributions. The bench allowed the appeals — the lead case being the one filed by Manipal Academy of Higher Education — saying "the inevitable conclusion is that basic wage was never intended to include amounts received for leave encashment". It took note of a Mumbai case where an employer was including the amount of leave encashment as emoluments for the purpose of calculating PF dues from the employer as well as employees’ contribution. When the Employees’ Union took up the issue with the commissioner, it was informed that the provision did not provide for deduction of PF on leave encashment. "Where the wage is universally, necessarily and ordinarily paid to all across the board, such emoluments are basic wages. Conversely, any payment by way of a special incentive or work, is not basic wages," the court said. dhananjay.mahapatra@timesgroup.com The judges have, significantly, also held that not just offences under 498-A, but also other offences such as murder, rape, attempt to murder and causing grievous hurt — which are not specifically mentioned in the law as ‘compoundable’ offences — cannot be settled between the complainant and the accused. Section 320 of the CrPC lists offences that can be settled between parties at any stage of the prosecution.

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