In Pramod Kumar Jain v. DCIT, the Bangalore ITAT ruled that proceeds from repurchasing vested, unexercised employee stock options (ESOPs) are taxable as capital gains rather than salary. Because the taxpayer never exercised the options or received shares, statutory ESOP perquisite provisions under section 17(2)(vi) were not triggered. Instead, the Tribunal held that vested options represent enforceable contractual rights constituting "capital assets," whose surrender equals a transfer giving rise to capital gains. However, tax characterisation remains debated due to the employment nexus, option transferability restrictions, and specific buyback rules.
A. IntroductionA recent ruling of the Bangalore Bench of the Income-tax Appellate Tribunal in Pramod Kumar Jain v. DCIT1 has revived the debate on the characterisation of proceeds received upon repurchase of vested but unexercised employee stock options.
The Tribunal held that the proceeds arose from transfer of a capital asset and were taxable as capital gains, rather than salary. The ruling raises a broader question: whether a receipt originating in an employment arrangement necessarily retains the character of salary, or whether the nature of the right surrendered independently determines its character.