Allotment date

An Employee Stock Option Plan moves through three distinct dates, and mixing them up is one of the easiest ways to get an ESOP tax question wrong.

The vesting date is when the employee first becomes entitled to buy the shares. The exercise date is when the employee actually chooses to buy them, paying the pre-determined price. The allotment date is when the shares are actually credited to the employee — which can happen a little later than the exercise date, once the company processes the transfer.

The allotment date matters because it is the date the law uses to start the holding period clock for capital gains — not the exercise date, and not the vesting date.

Two separate values are calculated at two separate dates, and it is easy to reach for the wrong one:

• Cost of acquisition, for computing the eventual capital gain, is the fair market value on the date of exercise — not the date of allotment.
• Period of holding for capital gains, however, runs from the date of allotment — not the date of exercise, and not the vesting date.

Once shares are allotted, the ordinary equity capital gains rules apply from that date: 12 months for listed equity shares to become long-term. If STT is paid on sale, long-term gains are taxed under Section 112A (12.5% above Rs 1,25,000); short-term gains at 20% under Section 111A. Unlisted shares need 24 months to become long-term, taxed under Section 112.

The perquisite tax event — the difference between the FMV on the exercise date and the price the employee paid — is taxed as salary in the year of allotment, even though the FMV used for that calculation is measured on the earlier exercise date.

Mr John exercises his ESOP option on 1 April 2024. The shares are actually allotted to him on 1 May 2024. He sells them on 1 August 2024.

His holding period runs 3 months — from 1 May to 31 July 2024 — not the roughly 4 months it would be if wrongly counted from the exercise date of 1 April. Either way the shares are short-term here, but on a holding closer to 12 months, using the wrong start date could wrongly flip the answer between short-term and long-term.

Chapter 12 (Taxation of Other Products), section 12.1.2, states plainly that the holding period runs from the date of allotment and not from the date the option was exercised, with the workbook's own Example 4 using exactly the 1 April / 1 May / 1 August dates above. Expect a question that gives all three ESOP dates and asks for the correct holding period, or the correct cost of acquisition.

• Holding period starts at allotment; cost of acquisition is fixed at exercise. Two different dates for two different purposes — this is the standard trap.
• Vesting date is irrelevant to both calculations — it only marks when the employee became entitled to exercise.
• The perquisite (salary) tax event is dated to the year of allotment, but uses the FMV measured on the exercise date — a third combination, easy to confuse with the other two.
• Allotment can lag exercise by weeks, which is exactly why the distinction is tested — a holding period that straddles the 12-month line can come out differently depending on which start date is used.