Flipkart ESOP Buyback Compensation Taxable as LTCG, Says ITAT

The Income Tax Appellate Tribunal (ITAT) in Bengaluru has ruled that ₹2.33 crore received by a Flipkart employee from the buyback of vested but unexercised Employee Stock Option Plans (ESOPs) should be taxed as Long-Term Capital Gains (LTCG) rather than as salary income or a perquisite. The decision provides significant tax relief for employees receiving compensation linked to unexercised ESOPs and clarifies that ESOPs become taxable as a salary benefit only when they are actually exercised.

The case stems from Flipkart’s 2022 corporate restructuring, when the separation of PhonePe reduced the value of unexercised ESOPs held by employees. To compensate affected employees, Flipkart’s Singapore-based parent made a voluntary one-time payment. Tax authorities argued that the compensation should be treated as a taxable salary perquisite, while the employee maintained that it represented consideration for a capital asset. The tribunal sided with the employee, reinforcing earlier judicial interpretations that vesting alone does not trigger salary taxation.

ITAT Rules ESOP Buyback Gains Are Long-Term Capital Gains

The Bengaluru ITAT held that:

• Vested ESOPs are not taxable as salary merely because they have vested.
• Tax as a salary perquisite arises only when the options are exercised and shares are allotted.
• Compensation received for the buyback of unexercised vested ESOPs should instead be treated as Long-Term Capital Gains (LTCG).

Case Snapshot

Item	Details
Tribunal	Income Tax Appellate Tribunal (Bengaluru)
Company	Flipkart
Amount Received	₹2.33 crore
Tax Treatment	Long-Term Capital Gains (LTCG)
Tax Department’s View	Salary/perquisite
ITAT Decision	LTCG, not salary

Background: Flipkart-PhonePe Restructuring

The dispute traces back to Flipkart’s restructuring in 2022, when PhonePe was separated from the Flipkart Group.

As a result:

• The value of many unexercised ESOPs declined.
• Flipkart’s Singapore parent voluntarily compensated affected employees.
• The payment was made despite there being no contractual obligation to do so.
• Tax authorities sought to classify the compensation as salary income.

Why the Tribunal Favoured LTCG

The ITAT concluded that the compensation was linked to a capital asset rather than employment benefits.

The tribunal observed that:

• Vesting does not amount to exercising an ESOP.
• No shares had been allotted when the compensation was received.
• Since the options remained unexercised, the payment could not be treated as a salary perquisite under the Income-tax Act.
• The compensation therefore falls under the capital gains provisions.

Salary vs LTCG

Salary Perquisite	Long-Term Capital Gain
Triggered when ESOPs are exercised	Applies to compensation linked to unexercised vested ESOPs
Taxed under salary income	Taxed under capital gains provisions
Employer deducts tax as salary	Capital gains tax rules apply

Significance for Startup Employees

The ruling could have wider implications for employees across India’s startup ecosystem, where ESOPs are a major component of compensation.

Potential impact includes:

• Greater clarity on taxation of voluntary ESOP compensation.
• Lower tax liability in similar buyback situations.
• Guidance for startups undertaking restructurings or ESOP buyback programmes.
• A stronger distinction between employment income and capital gains.

However, the issue is not fully settled. Earlier court decisions have taken differing views on the tax treatment of similar ESOP compensation, meaning future litigation or a Supreme Court ruling could provide final clarity.

Looking Ahead

The ITAT’s ruling marks another important development in India’s evolving ESOP taxation framework. By holding that compensation received for the buyback of vested but unexercised ESOPs should be taxed as Long-Term Capital Gains rather than salary, the tribunal has reinforced the principle that ESOPs become taxable as employment benefits only upon exercise. For startup employees, founders, and companies that rely heavily on equity-based compensation, the decision offers greater certainty over the tax treatment of similar transactions.

Looking ahead, the judgment could influence future ESOP-related disputes and corporate restructuring exercises across India’s startup ecosystem. However, given the differing interpretations in earlier cases, the matter may ultimately require a definitive ruling from the Supreme Court to establish a uniform legal position on the taxation of voluntary ESOP compensation.