The Federal Board of Revenue (FBR) has announced a significant tax relief for employees by granting exemptions to employee share schemes under the updated Income Tax Ordinance, 2001 for the tax year 2025-26.
These schemes are designed to reward employees by allowing them to acquire company shares, either at a discounted rate or free of charge, as part of their compensation package.
What Are Employee Share Schemes?
Employee share schemes are special arrangements under which a company provides shares to its employees or to trustees who then transfer the shares to employees. These schemes aim to encourage employee loyalty, align interests with company growth, and serve as a motivational tool for long-term performance.
Under Section 14 of the Ordinance, the value of a right or option to acquire shares through such schemes will not be chargeable to tax at the time it is granted. This means employees will not face immediate tax liability upon receiving an option to acquire company shares.
When Is Tax Applied?
Although the grant of an option is tax-exempt, taxation may apply later depending on how the scheme is structured:
1. Shares Issued Without Transfer Restrictions
o If an employee receives shares directly under a scheme, the taxable amount is based on the fair market value of the shares on the date of issue, minus any payment made by the employee.
2. Shares with Transfer Restrictions
o If there are restrictions on selling or transferring the shares, no tax is charged until the restriction is lifted or the shares are disposed of. At that time, the fair market value will be calculated, and tax will apply accordingly.
3. Disposal of Rights or Options
o If an employee decides to sell their right or option instead of exercising it, tax will be applied to any gain made from the disposal.
Why Is This Exemption Important?
This exemption encourages companies to offer employee share schemes as part of compensation packages without imposing an immediate tax burden. It also motivates employees to contribute to company performance, as their potential financial gains are directly tied to the company’s success.
Interactive Tip for Employees
• Check whether your employer offers any employee share schemes.
• Understand the timing of taxation—granting of rights, issuance of shares, or disposal of shares may trigger tax liability differently.
• Consult HR or payroll departments to know how these schemes are structured and how they affect your taxable income.
Disclaimer
This article is for informational purposes only and does not constitute tax advice. Employees should seek guidance from the FBR or professional tax consultants regarding the treatment of employee share schemes under the latest tax rules for 2025-26.