Big relief for startup employees.
His own employer’s Form 16 taxed his ESOP payout as salary. The tribunal just ruled the employer got it wrong, and the tax difference is enormous.
1. Pramod Kumar Jain held 2,653 vested stock options under Flipkart’s 2012 ESOP plan, but he never exercised them.
Flipkart’s Singapore parent company bought the options back directly from him for Rs 2.33 crore instead.
2. He reported that Rs 2.33 crore as long term capital gains when he filed his return.
His employer saw it differently and had already deducted TDS on the amount as if it were salary, which is exactly how it showed up on his Form 16.
3. The Assessing Officer went with the employer’s Form 16 rather than the employee’s return, and reclassified the full amount as a salary perquisite under Section 17(2).
The Commissioner of Income Tax Appeals agreed, so Pramod Jain took the matter to the ITAT.
4. The Bangalore bench had to answer one specific question.
Can an ESOP be taxed as a salary perquisite before the employee has actually exercised it and received the shares?
4. The Bangalore bench had to answer one specific question.
Can an ESOP be taxed as a salary perquisite before the employee has actually exercised it and received the shares?
5. The tribunal said no.
An unexercised option is only a right to buy shares at some point in the future, not a security you already own. Section 17(2)(vi) taxes securities that have actually been allotted, and here no shares were ever allotted before the buyback.
6. So the tribunal reversed both the Assessing Officer and the Commissioner of Income Tax Appeals.
The Rs 2.33 crore stays classified as long term capital gains, not salary.
7. Why this matters:
Salary can be taxed at slab rates running into the high thirties once surcharge and cess are added.
LTCG is generally taxed at a flat 12.5%, without indexation.
Same rupee amount, very different tax bill, depending entirely on where in the ESOP lifecycle the payout happened.
8. Important caveat.
This ruling is fact specific, not a blanket rule.
It applies where options were vested, never exercised, and consideration was received for surrender or buyback.
Delhi, Karnataka, and Madras High Courts have given inconsistent answers on similar Flipkart payouts before, so this remains contested, not settled.
9. If you work at a startup and get offered an ESOP buyback, do not assume your employer’s Form 16 has classified the payout correctly.
This case shows that even Flipkart’s own TDS treatment did not survive scrutiny at the tribunal.
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.