Archive · 6 Aug 2026
ITAT rules unexercised ESOP buyback payouts taxable as capital gains
When you work at a company, you might be given 'stock options.'
These are like golden tickets that let you buy a piece of the company later.
A worker named Pramod Kumar Jain got these tickets from his employer, Flipkart.
The company bought some of his tickets back and paid him Rs 2.33 crore before he ever used them.
The tax office, called the Income Tax Department, said this money was like a salary and should be taxed the way wages are.
But a special tax court called the Income Tax Appellate Tribunal said it was more like selling something you own.
When you sell something you own, the profit is called a 'capital gain.'
The court pointed out that Jain never used his tickets and never got any shares, so he was only selling his right to buy shares later.
The court also said that just because a company writes 'salary' on a form, that does not decide how the tax law treats the money.
So the court decided the money should be taxed as capital gains, not as salary.
The Bengaluru bench of the Income Tax Appellate Tribunal (ITAT) ruled that payouts from the repurchase of vested but unexercised employee stock options (ESOPs) cannot automatically be taxed as salary.
Former Flipkart employee Pramod Kumar Jain received over Rs 2.33 crore when Flipkart Singapore repurchased 2,653 of his vested stock options during FY 2020-21 before he exercised them.
The Income Tax Department treated the amount as a salary perquisite under Section 17(2)(vi) of the Income-tax Act and reopened his assessment, but the tribunal disagreed.
The ITAT held that unexercised stock options are a capital asset and that their repurchase amounted to a transfer, making the gains taxable as capital gains.
The tribunal rejected the department's reliance on Form 16 and TDS, noting that TDS is only a tax collection mechanism and does not determine the correct head of income.
- Who
- Pramod Kumar Jain, a former Flipkart employee, the Income Tax Department, and the Bengaluru bench of the Income Tax Appellate Tribunal (ITAT), which decided the case.
- What
- The ITAT ruled that money received from the repurchase of vested but unexercised ESOPs is taxable as capital gains, not as salary.
- When
- The ESOP repurchase and the disputed income occurred during financial year 2020-21; the article does not specify the date of the ITAT ruling.
- Where
- Bengaluru, India, where the ITAT bench that heard the appeal is located.
- Why
- Because the ESOPs were never exercised and no shares were allotted, the tribunal held that the options were a capital asset whose repurchase constituted a transfer.
Taxpayer's view (upheld by ITAT)
Income Tax Department's view
Tax head for unexercised ESOP buyback
Taxpayer's view (upheld by ITAT)
The payout is consideration for the transfer of a capital asset and should be taxed as capital gains because the options were never exercised and no shares were allotted.
Income Tax Department's view
The payout is a salary perquisite under Section 17(2)(vi) because the options were granted due to employment and the employer showed the amount in Form 16 with TDS deducted.
Weight of Form 16 and TDS
Taxpayer's view (upheld by ITAT)
TDS is only a mechanism for collecting tax in advance and does not determine the correct head of income; taxability must be decided according to the Income-tax Act.
Income Tax Department's view
The employer's reporting of the amount as a perquisite in Form 16 with TDS deducted under Section 192 supports taxing the payout as salary.
- Case
- Pramod Kumar Jain vs DCIT, Circle-3(3)(1), Bengaluru
- Tribunal
- Income Tax Appellate Tribunal (ITAT), Bengaluru bench
- Amount in dispute
- Over Rs 2.33 crore
- Buyer of options
- Flipkart Singapore
- Options repurchased
- 2,653 vested stock options (out of 40,536 granted)
- Financial year
- FY 2020-21
- Key provision
- Section 17(2)(vi) of the Income-tax Act, 1961
- Supreme Court precedent
- CIT vs B.C. Srinivasa Setty (1981) 128 ITR 294 (SC)