Flipkart ESOP Compensation: ₹11 Crore Payout – Salary or Capital Receipt?

Flipkart

Flipkart ESOP Compensation: ₹11 Crore Payout – Salary or Capital Receipt?

Flipkart

In a landmark situation that could set a precedent for global tech employees, Flipkart employees received massive discretionary payouts after their ESOPs lost value due to a corporate restructure. But the key question remains—should such payouts be taxed as salary or treated as capital receipts?

Here’s a deep dive into the legal tangle and what it means for your ITR filing this season.

The Background: Flipkart, PhonePe & ESOPs

Employees of Flipkart were granted ESOPs by its parent company, Flipkart Pvt Ltd (FPS), based in Singapore.

Then came a major corporate development—PhonePe was demerged from Flipkart. This restructuring significantly eroded the valuation of the ESOPs that had been allotted to employees.

What followed was highly unusual: FPS voluntarily chose to compensate employees for the notional loss in ESOP value—even though there was no legal or contractual obligation to do so.

Flipkart

This wasn’t a token gesture. The payouts were substantial:

  • One employee received ₹76 lakh

  • Another received over ₹11 crore
    And this was for ESOPs that had not even been exercised.

The Central Tax Question

The real debate centers around this:
Is this payout taxable as salary (perquisite)? Or is it a non-taxable capital receipt?

Let’s examine both arguments.

Argument 1: It's Taxable Salary under Section 17(2)(vi)

Section 17(2)(vi) of the Income Tax Act, 1961 includes in salary the value of any specified security or sweat equity shares allotted or transferred, either directly or indirectly, to the employee by virtue of employment.

The Madras High Court held that this language is broad enough to include such discretionary payouts—even for unexercised ESOPs.
So, even though the ESOPs were not exercised, the court considered the payout a taxable perquisite, making TDS applicable.

Argument 2: It's a Non-Taxable Capital Receipt

However, both the Delhi High Court and Karnataka High Court disagreed. Their key observations:

  • The ESOPs were never exercised

  • No shares were transferred

  • The compensation was a voluntary, one-time goodwill gesture

  • There was no contractual right to this payout

As per these courts, the payout was not linked to any “perquisite” arising from employment but rather a capital receipt, not liable to income tax.

Hence, TDS should not have been deducted, and employees could be entitled to refunds.

Legal Conflict: Divergent High Court Views

This issue has now resulted in directly conflicting judgments:

  • Delhi HC (Sanjay Baweja case)

  • Karnataka HC (Manjeet Singh Chawla case)
        Versus

  • Madras HC (Nishithkumar Mehta case)

While the Delhi and Karnataka HCs protected employees from tax on unexercised ESOP payouts, Madras HC ruled such amounts are salary income and hence taxable.

This is not a case of differing interpretations—it’s a direct legal face-off.

What Should Flipkart Employees (and Others) Do Now?

If you’re one of the affected employees (or in a similar situation), here’s what you should consider:

  • If TDS was deducted, you may claim a refund while filing your ITR, based on Delhi and Karnataka HC rulings.

  • Maintain all documentation related to how the compensation was computed.

  • Stay tuned for further developments—Supreme Court intervention is likely, and its decision will provide final clarity.

Why This Case Has Wider Implications

This isn’t just about Flipkart.

Many global corporations grant ESOPs via offshore entities, and corporate restructuring events—like spin-offs, mergers, and demergers—can impact valuations. If companies begin issuing discretionary compensation for such value erosion, the tax treatment must be clearly defined.

With rising cross-border employment and stock-based compensation becoming the norm, this issue will only grow in relevance.

Read More: NRI Tax Filing in India: A Guide to Rent, Capital Gains & Interest Income

Key Takeaway

For now: Taxpayers who’ve received such ESOP-related payouts should evaluate legal precedents, maintain records, and consider seeking refunds if TDS has been deducted.

But keep in mind—this issue is headed for the Supreme Court. Until then, caution and awareness are key.

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Breaking Down Salary Taxation: Taxable vs. Non-Taxable Elements

Salary Taxation

Breaking Down Salary Taxation: Taxable vs. Non-Taxable Elements

Salary Taxation

Salary taxation in India is governed by the Income Tax Act, 1961, which defines salary under Section 17(1) to include various components such as basic salary, bonuses, commissions, allowances, and perquisites. Salaries are taxed based on the earlier occurrence of the due or receipt basis. Factors such as place of accrual and residency status significantly impact the taxation of salary. While some perquisites, like rent-free accommodation and medical reimbursements, enjoy tax exemptions under specific conditions, others, such as subsidized housing and employer-provided vehicles, are fully taxable. Profits in lieu of salary, including severance packages and gratuities, are generally taxable but may qualify for exemptions under sections like 10(10) for gratuities and 10(10AA) for leave encashment. Deductions under Section 16, such as the standard deduction of ₹50,000 and professional tax, help in optimizing tax liabilities. A well-structured salary package incorporating available exemptions and deductions can aid in efficient tax planning and compliance.

Introduction

Salary refers to the remuneration an individual receives in return for services rendered under an employer-employee relationship. Under the Income Tax Act, 1961, salary is a broad term encompassing wages, bonuses, commissions, perquisites, and allowances. The taxation of salary income is not solely based on the amount received in the previous year but follows the due or receipt basis, whichever occurs earlier. To determine whether a salary is taxable, it is essential to establish an employer-employee relationship and understand various salary components.

Salary Taxation

Components of Salary under Section 17(1)

The Income Tax Act classifies salary into multiple components, including:

  • Basic Salary or Wages

  • Bonuses and Commissions

  • Overtime Payments

  • Advance Salary and Arrears

  • Pension and Annuity

  • Gratuity and Leave Encashment

  • Retrenchment Compensation and Voluntary Retirement Benefits

  • Employer’s Contribution to Recognized Provident Fund

  • Amounts received under a notified pension scheme (Section 80CCD)

Basis of Charge for Salary Income (Section 15)

Salaries are taxed based on the earlier occurrence of the due basis or receipt basis. The following types of salary income are taxable in a given year:

  1. Salary paid before its due date

  2. Salary that becomes due, irrespective of whether it is received

  3. Salary arrears received during the financial year, if not taxed earlier

Place of Accrual and Taxability of Salary

The taxability of salary also depends on where the services are rendered:

  • Services rendered in India: Salary is taxable in India, irrespective of where the employer is located or the employee’s residential status (Section 9(ii)).

  • Tax Residents of India: All salary income, whether earned in India or abroad, is subject to taxation in India.

  • Non-Residents: They are taxed only on the income earned or accrued in India (Section 6).

  • DTAA Provisions: Double Taxation Avoidance Agreements (DTAA) may influence taxation for individuals receiving salaries from overseas employers.

Deductions from Salary Income (Section 16)

The following deductions are allowed from salary income:

  • Standard Deduction: ₹50,000 (applicable from AY 2020-21 onwards)

  • Professional Tax: Deductible if levied by the state government

  • Entertainment Allowance: Deduction for government employees, limited to ₹5,000 or 20% of salary or the actual amount received, whichever is lower

Perquisites and Their Taxation (Section 17(2))

Perquisites are additional benefits received by employees apart from their salary. They can be classified as:

Exempt Perquisites

Some perquisites are exempt from taxation under specific conditions:

  • Rent-Free Accommodation: Exemptions depend on the employee’s salary and location.

  • Medical Benefits: Treatment in government or employer-run hospitals is tax-free.

  • Health Insurance Contributions: Employer-paid premiums for group health insurance are tax-exempt.

  • Employer-Provided Electronic Devices: Laptops and mobile phones for official use are exempt.

  • Provident Fund and Superannuation Contributions: Exempt up to specified limits.

  • Leave Travel Concession (LTC): Domestic travel expenses for employees and family are exempt twice in a four-year block.

Taxable Perquisites

Certain perquisites are taxable and included in salary:

  • Rent-Free Accommodation: Taxable based on location (15% of salary in metro cities, 10% in other areas).

  • Employer-Provided Vehicle: Taxable if fuel and maintenance are covered by the employer.

  • Interest-Free or Low-Interest Loans: Taxable based on the difference between the employer’s interest rate and the prevailing State Bank of India lending rate. Loans up to ₹20,000 are exempt.

Profits in Lieu of Salary (Section 17(3))

These payments substitute regular salaries and are taxed as per salary income:

  • Compensation on Job Termination (subject to exemption under Section 10(10C))

  • Payment Due to Changes in Employment Terms

  • Post-Employment Payments (e.g., deferred bonuses, gratuities exceeding exemption limits)

  • Severance Benefits and Signing Bonuses

  • Payouts from Keyman Insurance Policies

  • Payments from Employers or Third Parties

Exemptions for Profits in Lieu of Salary

Certain exemptions help reduce tax liability:

  • Gratuity Exemption (Section 10(10)): Tax-free up to specified limits.

  • Leave Encashment Exemption (Section 10(10AA)): Tax-free under certain conditions.

  • Voluntary Retirement Scheme (VRS) Exemption (Section 10(10C)): Tax-free up to ₹5,00,000.

Read More: Income Tax Bill 2025: 10 Key Takeaways You Need to Know

Salary income is a primary source of earnings for most individuals and comprises multiple components. Understanding what is taxable and what qualifies for exemptions is essential for effective tax planning. Employers and employees alike must be well-versed in perquisites and profits in lieu of salary, as different benefits have varied tax implications. While perquisites can provide financial advantages, some may still be taxable. Similarly, severance payments and deferred salaries may attract taxes but can also qualify for exemptions. By structuring salary packages optimally and utilizing available deductions and exemptions, individuals can minimize tax liability while ensuring compliance with tax regulations.

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Tax-Free Benefits for Salaried Individuals Under the Income Tax Act

Salaried

Tax-Free Benefits for Salaried Individuals Under the Income Tax Act

Salaried

Understanding Salary Taxation

Under the Income Tax Act, 1961, salary income encompasses wages, bonuses, and perquisites earned in an employer-employee relationship, governed by sections 15, 16, and 17. Tax is levied on a due or receipt basis, whichever is earlier. However, the Act provides several tax-free benefits to ease the burden on salaried individuals. Here’s a detailed look at these exemptions.

Medical Perks and Tax Exemptions

1. Employer-Run Medical Facilities: Free medical treatment at employer-operated hospitals or dispensaries for employees or their families is exempt from tax.

2. Approved Hospitals: Medical expenses covered by the employer at government-approved hospitals are exempt.

3. Critical Illness Treatment: Costs for treating severe ailments like cancer or heart conditions at specific approved hospitals are tax-free.

4. Health Insurance Plans: Premiums paid for group health insurance or policies under Section 80D qualify for exemption.

5. Overseas Medical Treatment: Medical expenses abroad, including accommodation up to ₹2,50,000 annually (as per RBI guidelines), are tax-free.

6. COVID-19 Medical Expenses: Employer-paid costs for COVID-19 treatment, starting from assessment year 2020-21, are exempt.

Salaried

Exemptions on Meals and Refreshments

1. Meals at the Workplace: Meals, tea, coffee, and snacks provided during working hours are tax-free.

2. Food Coupons: Meal vouchers worth up to ₹50 per meal are exempt from taxation.

Phone and Internet Allowances

Reimbursements for business-related telephone and internet expenses are fully exempt.

Occasional Gifts and Tokens

Gifts in the form of vouchers or tokens up to ₹5,000 annually are tax-free.

Employer-Provided Computers or Laptops

Computers or laptops given for official or personal use are exempt from taxation.

Recreational and Entertainment Facilities

Facilities for group recreation or entertainment offered by the employer are tax-exempt.

Personal Accident Insurance

Premiums paid by the employer for personal accident insurance policies for employees are exempt, as supported by judicial precedents.

Judges’ Housing and Vehicle Facilities

Perquisites like rent-free housing and official vehicle usage for High Court and Supreme Court judges are exempt from tax.

Exemptions for Government Employees Working Abroad

Salaries for Indian government employees posted abroad are taxable in India. However, foreign allowances and perquisites under Section 10(7) are tax-exempt.

Salaried

Taxable Perquisites and Additions to Income

Certain employer-provided benefits are taxable, such as:

  • Rent-free housing (except specific exemptions).
  • Employer payments for personal expenses like club memberships or hotel bills.
  • Life insurance premiums paid on behalf of the employee.

Read More: Mandatory Disclosure of Foreign Assets in Income Tax Returns: Penalty & Deadline

Special Considerations for Salary Taxation

1. Taxation on Due Basis: Salary is taxable when due or received, whichever is earlier.

2. Pensions Received Abroad: Pensions for Indian service received abroad are taxable in India, even for non-residents.

3. Exclusions for Private-Sector Employees: Indian private-sector employees abroad do not receive the same exemptions as government employees.

The Income Tax Act, 1961, includes several provisions to make taxation equitable for salaried individuals. By effectively utilizing these tax-free benefits, taxpayers can significantly lower their tax liabilities.

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