Perquisite (Perks Tax)
What is a Perquisite? ESOP Perquisite Tax Explained
A perquisite in ESOP context is the difference between the Fair Market Value of shares at exercise and the exercise price paid by the employee. This amount is taxed as salary income.
In India, it falls under Section 17(2) of the Income Tax Act and is taxed at the employee's slab rate (up to 31.2%). The employer must deduct TDS at the time of share allotment.
The challenge is that employees pay tax on paper gains without having received any cash. This is why ESOP tax deferral (available for eligible startups under Section 80-IAC) was introduced, deferring perquisite tax until a liquidity event.