Archive · 4 Aug 2026
ITAT Rules ESOP Buyback Payouts Are Capital Gains
When a company gives employees the right to buy shares later, that right is called an ESOP.
If the company buys back that right before the employee actually buys the shares, the money the employee gets is treated like selling a piece of property, not like a paycheck.
The Income Tax Appellate Tribunal said this money should be taxed as a capital gain.
This means it might be taxed at a lower rate than regular salary.
The decision came after a Flipkart employee got paid when Walmart bought Flipkart.
The ruling also says that the way a company withholds tax at the source does not decide whether the money is a salary or a capital gain.
This could help startup workers pay less tax on their ESOP payouts.
ITAT ruled that payouts from vested but unexercised ESOP buybacks are capital gains, not salary.
Decision based on a Flipkart employee case after Walmart’s acquisition of Flipkart.
ESOPs are taxed as salary only when options are exercised and shares are allotted.
Tax deducted at source by the employer does not determine the nature of the income.
Ruling could lower tax burden for startup employees by applying capital gains tax rules.
- Who
- Income Tax Appellate Tribunal (Bengaluru bench)
- What
- Ruling that payouts from vested but unexercised ESOP buybacks are taxed as capital gains, not salary
- Where
- Bengaluru, India
- Why
- To clarify tax treatment and potentially reduce tax burden for startup employees
- Ruling Authority
- Income Tax Appellate Tribunal (Bengaluru bench)
- Tax Treatment
- Capital gains
- Applicable to
- Vested but unexercised ESOP buybacks
- Key Case
- Flipkart employee after Walmart acquisition
- TDS Impact
- Does not determine income nature
