ESOP Buyback: Are You Paying the Wrong Tax?

A tax tribunal ruling says when a company buys back vested but unexercised ESOPs, the gain is taxed as capital gains — not salary income. This can mean a much lower tax rate for employees who received such payouts.

Here's what happened: Bangalore's Income Tax Appellate Tribunal ruled that a company repurchasing vested but unexercised ESOPs creates a capital gains event, not a salary perquisite taxable under Section 17(2)(vi).. The distinction matters because salary perquisites attract tax at the employee's full marginal rate (up to 30% plus surcharge), while capital gains may be taxed at 10–20% depending on the holding period.. This ruling gives employees who received ESOP buyback proceeds — and were taxed as salary — legal grounds to argue for a lower tax classification when filing or revising their ITR..

What you should do: Check your Form 16 and salary slip: if your employer classified ESOP buyback proceeds as a perquisite and deducted TDS at your salary slab rate, flag this with your CA before filing your ITR.. File your ITR correctly by reporting the ESOP buyback under capital gains (short-term or long-term depending on holding period), not under 'income from salary', to claim the lower applicable tax rate.. If you already filed and paid excess tax treating the payout as salary income, consult a CA about filing a revised ITR or rectification request to claim a refund before the deadline..

The holding period for capital gains on ESOPs typically starts from the date of grant or vesting — get this date confirmed in writing from your employer's HR or ESOP administrator before filing.

For readers weighing their credit and loan options, our personal loan guide and CIBIL score resources put this update in context.