India tax authorities clarify rules on arrears and ESOP buy-backs

The Indian Income Tax Department and the Income Tax Appellate Tribunal (ITAT) have provided clarifications regarding the taxation of specific lump-sum payments and employee stock options.

Under Sections 157 and 158 of the Income-tax Act, taxpayers can claim relief on lump-sum receipts such as salary arrears, advance salary, gratuity, and certain pension payments. Section 157 is designed to prevent higher tax burdens by ensuring income is taxed in the year it relates to, rather than the year it is received. Additionally, Section 158 allows eligible residents to defer tax on specified foreign retirement benefit accounts until withdrawal.

In a separate ruling, the Bangalore Bench of the ITAT determined that consideration received from the buy-back of vested but unexercised stock options should be taxed as long-term capital gains rather than salary perquisites. This decision, involving an employee of Flipkart Internet Private Limited, provides significant relief for employees using ESOP buy-back programmes as a liquidity mechanism.