The Income Tax Appellate Tribunal, Bangalore Bench “B”, in Pramod Kumar Jain v. DCIT, Circle-3(3)(1), Bangalore, has held that consideration received upon the repurchase of vested but unexercised employee stock options is taxable as long-term capital gains and cannot be assessed as a salary perquisite under Section 17(2)(vi) of the Income Tax Act, 1961.
The ruling was delivered in ITA No. 3034/Bang/2025 for Assessment Year 2020–21 and was pronounced on 30 July 2026. The assessee’s appeal arose from an order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, sustaining the taxation of the stock-option repurchase amount under the head “Salaries.”
Background of the Case
The assessee was employed with Flipkart Internet Private Limited, an Indian group entity. During the course of his employment, he was granted stock options by Flipkart Private Limited, Singapore, under the Flipkart Stock Option Scheme, 2012.
A total of 40,536 stock options had been granted to the assessee over different financial years. During the relevant year, Flipkart Private Limited, Singapore repurchased 2,653 vested stock options for a consideration of ₹2,33,80,616.
The assessee treated the vested stock options as capital assets and offered the gains arising from their repurchase under the head “Capital Gains.” The Assessing Officer, however, relied upon Form 16, the deduction of tax under Section 192 and the tax treatment mentioned in the repurchase offer documents to classify the amount as a perquisite taxable under the head “Salaries.”
The CIT(A) upheld the assessment on the ground that the stock options had been granted in connection with the assessee’s employment and therefore fell within Section 17(2)(vi).
Whether Unexercised Stock Options Constitute a Salary Perquisite
The Tribunal examined the various stages involved in an employee stock-option arrangement—grant, vesting, exercise, allotment of shares and eventual sale of shares.
It noted that the stock options granted to the assessee had only vested. They had never been exercised, and no underlying shares had been allotted or transferred to the assessee.
Section 17(2)(vi) applies to the value of specified securities or sweat equity shares allotted or transferred, directly or indirectly, by an employer or former employer free of cost or at a concessional rate. The valuation mechanism under the provision is also linked to the fair market value of the specified security on the date on which the option is exercised.
The Tribunal therefore held that the taxable event contemplated under Section 17(2)(vi) arises only after the employee exercises the stock option and the specified security comes into existence through allotment or transfer.
Until the option is exercised, it remains only a right available to the employee to subscribe to the underlying shares. Such an unexercised option cannot itself be treated as a specified security for the purpose of taxing a perquisite under the head “Salaries.”
Since the assessee had neither exercised the options nor received any shares, the Tribunal concluded that no specified security had come into existence and the computation mechanism prescribed under Section 17(2)(vi) could not be applied.
Vested Stock Options Are Capital Assets
The Tribunal further considered whether the vested stock options represented capital assets.
Under the Flipkart Stock Option Scheme, vesting gave the assessee a right, though not an obligation, to purchase or subscribe to the underlying shares at a predetermined price. The Tribunal observed that Section 2(14) defines a capital asset widely as property of any kind held by an assessee.
It also referred to Explanation 1(e) to Section 2(42A), which expressly recognises a right to subscribe to a financial asset as a capital asset.
Relying upon the principles laid down by the Supreme Court in Dhun Dadabhoy Kapadia v. CIT and the jurisdictional Karnataka High Court in Chittharanjan A. Dasannacharya v. CIT, the Tribunal held that a stock option representing the right to purchase the underlying shares is a capital asset in the hands of the option holder.
Repurchase Amount Taxable as Long-Term Capital Gains
The repurchase of 2,653 vested stock options resulted in the assessee relinquishing or transferring his right to subscribe to the underlying shares.
Such repurchase therefore constituted a “transfer” within the meaning of Section 2(47) of the Income Tax Act. Since the gains arose from the transfer of a capital asset, they were chargeable under Section 45.
Accordingly, the Tribunal accepted the assessee’s treatment of the amount received upon repurchase of the vested stock options as long-term capital gains.
The Tribunal clarified that employee stock options may be taxed as a perquisite under Section 17(2)(vi) where the options are actually exercised and the underlying shares are allotted or transferred. However, where the transaction ends at the vesting and repurchase stages without exercise of the options, the salary-perquisite provision is not attracted.
Form 16 and TDS Do Not Determine Final Taxability
The Tribunal rejected the Revenue’s reliance on Form 16, Form 26AS and the deduction of tax under Section 192.
It held that tax deduction at source is merely a mechanism for advance collection of tax and does not conclusively determine the nature or head of income in the hands of the recipient. The final tax liability must be determined according to the applicable statutory provisions.
The Tribunal also observed that the tax treatment mentioned in the repurchase offer documents was only an indicative summary and was not intended to constitute complete tax advice. In any event, a contractual description or arrangement between parties cannot override the correct tax treatment under law.
Distinction from PhonePe Compensation Ruling
The Revenue relied upon the Madras High Court ruling in Nishithkumar Mukeshkumar Mehta v. DCIT, where compensation received in connection with the divestment of Flipkart’s stake in PhonePe was held taxable as a salary perquisite.
The Tribunal distinguished that decision on facts. In that case, the taxpayer continued to retain the stock options even after receiving compensation. In the present matter, 2,653 stock options were actually repurchased and extinguished against payment.
The consideration was therefore paid for the transfer of vested stock-option rights and not merely as compensation while the taxpayer continued to hold the options.
Decision of the Tribunal
The ITAT allowed the grounds challenging the taxation of the stock-option repurchase consideration as salary.
It held that:
The unexercised stock options did not become specified securities within Section 17(2)(vi).
No salary perquisite arose because the options were never exercised and no shares were allotted.
The vested stock options represented a capital asset in the form of a right to subscribe to the underlying shares.
The repurchase of those options constituted a transfer under Section 2(47).
The resulting gains were correctly offered to tax as long-term capital gains under Section 45.
The ground concerning interest under Section 234B was treated as consequential. Since relief was granted on merits, the challenge to the validity of reassessment proceedings was left open. The ground relating to initiation of penalty proceedings was treated as premature.
The assessee’s appeal was accordingly allowed.
Significance of the Ruling
The decision provides an important distinction between the vesting and exercise of employee stock options. Vesting merely creates an enforceable right to subscribe to shares, whereas the salary-perquisite provisions concerning specified securities operate when the option is exercised and shares are allotted or transferred.
The ruling is particularly relevant for employees participating in stock-option schemes of overseas parent or group companies, especially where vested options are repurchased or surrendered without being exercised.
It also reinforces that the treatment adopted by an employer in Form 16 or through TDS deduction does not bind the employee where the statutory character of the receipt is different.
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