Employee share scheme not chargeable to tax

Employee share scheme not chargeable to tax

ISLAMABAD: An employee share scheme granted to an employee is not chargeable to tax. Section 14 of the Income Tax Ordinance, 2001 explained the employee share scheme.

The Federal Board of Revenue (FBR) issued the updated Income Tax Ordinance, 2001. The Ordinance incorporated amendments brought through Finance Act, 2021.

Following is the text of Section 14 of the Income Tax Ordinance, 2001:

14. Employee share schemes.— (1) The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax.

(2) Subject to sub-section (3), where, in a tax year, an employee is issued with shares under an employee share scheme including as a result of the exercise of an option or right to acquire the shares, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the shares determined at the date of issue, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.

(3) Where shares issued to an employee under an employee share scheme are subject to a restriction on the transfer of the shares —

(a) no amount shall be chargeable to tax to the employee under the head “Salary” until the earlier of —

(i) the time the employee has a free right to transfer the shares; or

(ii) the time the employee disposes of the shares; and

(b) the amount chargeable to tax to the employee shall be the fair market value of the shares at the time the employee has a free right to transfer the shares or disposes of the shares, as the case may be, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.

(4) For purposes of this Ordinance, where sub-section (2) or (3) applies, the cost of the shares to the employee shall be the sum of —

(a) the consideration, if any, given by the employee for the shares;

(b) the consideration, if any, given by the employee for the grant of any right or option to acquire the shares; and

(c) the amount chargeable to tax under the head “Salary” under those sub-sections.

(5) Where, in a tax year, an employee disposes of a right or option to acquire shares under an employee share scheme, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount of any gain made on the disposal computed in accordance with the following formula, namely:—

A—B

where —

A is the consideration received for the disposal of the right or option; and

B is the employee’s cost in respect of the right or option.

(6) In this sub-section, “employee share scheme” means any agreement or arrangement under which a company may issue shares in the company to —

(a) an employee of the company or an employee of an associated company; or

(b) the trustee of a trust and under the trust deed the trustee may transfer the shares to an employee of the company or an employee of an associated company.

(Disclaimer: The text of above section is only for information. Team PkRevenue.com makes all efforts to provide the correct version of the text. However, the team PkRevenue.com is not responsible for any error or omission.)

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