Taxation issues  pertaining to SAR.

There are two  issues related to vesting of Stock Appreciation Rights as far as taxation of benefit due to  SAR is concerned

1. Perquisite in hands of employee
2. FBT payment by company issuing SAR
3. taxation of income out appreciation in share price (difference ) which an employee gets at the time of sale.

Is SAR a taxable perquisite in hands of employee?

Since ESOP has been made taxable under Fringe Benefit Tax , benefit on account of grant of SAR is not taxable in hands of employee.

     However, if the benefit of SAR for any reason is not taxable under FBT, same is taxable under section 17(2) by virtue of clause (vi) of the I T Act.

Taxation of Income On Exercise of Sale of Rights

When an employee exercise rights of SAR and claims the gain i.e  difference between the price of allotment and the price on the date of exercise , such gain is taxable under I T Act .  The first case related to SAR was decided by Income Tax Tribunal , Mumbai in case of Sumit Bhattacharya v. Assistant Commissioner of Income-tax Circle 16(1), Mumbai [2008] 19 SOT 663 (Mum.)(SB) / 113 TTJ 633.

Facts of the case was that The appellant taxpayer was, at the material point of time, i.e., in the previous year ending 31-3-1998, employed as Managing Director of the Procter & Gamble India Limited (hereinafter referred to as 'PGI') which is a part of the group of companies headed by Procter & Gamble Co., Inc., USA (hereinafter referred to as 'PGU'). There is no dispute about the fact that in January 1998, the assessee received a sum of US$ 12,38,084.02, which was equivalent to Rs. 4,79,13,851.58, from PGU on account of redemption of certain stock appreciation rights granted in October 1997. The assessee claimed the receipt as non taxable under I T Act on various ground.Both A.O and CIT(Appeal) did not agree with the assessee and taxed the income as salary.

Then the assessee approached the Tribunal which held the sum received by the assessee as taxable under the head 'Salary' even though the SAR was given the Proctor & Gamble ,USA of which the assessee was not an employee.

The tribunal , even otherwise held that if the appreciation receipt is not taxable under the head of 'Salary' , the same should be charged to tax under the head 'income from other sources'. In words of Tribunal

we have come to the conclusion that redemption of stock appreciation right is an employment-related benefit, in the nature of deferred wages contingent upon financial performance of the ultimate employer, i.e., parent company of the company with which the assessee has entered into employment contract, which is a purely monetary benefit. The same is directly of the income nature. As for the reliance placed by the learned counsel for the assessee on the judgments in the cases of N.A. Mody (supra) and T.P. Sidhwa (supra), in support of the proposition that an employment-related benefit cannot be taxed under a head other than 'income from salaries', we find that Hon'ble Supreme Court has duly considered these judgments and yet come to the conclusion that when an employment-related benefit is received from a person other than the employer, the same is taxable under the head 'income from other sources'.

Answer to your specific question

Your gain is to be taxed as income from other source . The same is not a capital gains, no exemption u/s 54F can be claimed.

In fact the , assessee in aforesaid case also raised this issue that at best the appreciation be taxed under capital gains , which the Tribunal turned down on following grounds

As regards assessee's plea that the amount in question can only be taxed under the head 'capital gains' as the receipt is on account of transfer of a capital asset consisting of right to receive stock appreciation rights, we see no substance in the same for the simple reason that, as we have held earlier in this order and as the very preamble of Procter & Gamble (1983) Stock Plan itself states, the amount in question is in the nature of a deferred wages, in the genus of bonus, incentives and like, received as a fruit of employment-related activity which is revenue receipt in nature, and it is only the quantification of this amount which is linked to a capital asset that is value of shares. The taxability is not in respect of the stock appreciation right per se but the amount received as a fruit of employment which is measured by way of a formula envisaged in the stock appreciation rights scheme.