Sweat Equity Shares

Sweat Equity Shares | How to Calculate the Taxable Amount of Sweat Equity Shares?

Sweat Equity Shares: In economics, sweat equity shares share a company’s issues with its directors or employees at a discounted or reduced price.

Under the Companies Act, a company cannot issue its shares at a discounted or reduced price to anyone. If a company does so, the claims are considered null or void. However, there are some special provisions under which a company can issue shares at a discounted price.

To better understand Sweat Equity Shares, this article presents you with a compilation of the basics that will help you understand the topic.

What are Sweat Equity Shares?

Sweat Equity Shares are shares which a company issues to its directors or employees. These shares are given to the personnel of the company at a reduced or discounted price.

There are many employees and directors of the organisation who work overtime to help the organisation grow. The company needs to recognise this hard work and effort put in by the director or employee. They do this by issuing the person sweat equity shares.

When Can You Tax Sweat Equity Shares?

There are certain conditions under which you can be taxed by the government for your sweat equity shares. Given below is a list of occasions for when you can be taxed on the sweat equity shares. These conditions can happen in the year that the employee or director is issued the sweat equity share, or it can happen whenever these conditions are fulfilled.

  • The security that is mentioned is specific security, or it is a sweat equity share.
  • The security mentioned is allocated to the person or transferred in their name after 1st April 2009.
  • The security is allowed or issued to an employee, directly or indirectly. It can either at a reduced or concessional amount or free of cost.

What is Security?

Security is an important document given in exchange for something. It’s essential that the security which is provided is acceptable and has value.

Here are some exams of what security can be:

  • Security can be shares of a company, stock, bonds, or any other document, marketable security of nature or form of any corporate body or an incorporated firm.
  • Units or any other financial instrument issued by a collective investment scheme to the investor in these kinds of techniques.
  • Derivatives.
  • Government securities.
  • Rights or interest earned from security.
  • Financial instruments are declared as security by the Central Government of India.
  • Debentures and debenture stocks are in a marketable form of security.

Sweat equity shares are equity shares issued by the company to its directors or employees. These shares are issued at a discounted rate. There’s no provision to give cash or cash consideration for the how-know provided or providing available rights like intellectual property rights or any additional value in sweat equity shares.

How to Calculate the Taxable Amount of Sweat Equity Shares?

Calculating the amount of taxes you need to file for the sweat equity shares is straightforward. You need to be aware of one thing before you start calculating your taxes on the shares. You need to know if your sweat equity shares are quoted or unquoted. You need to know this important thing before you start the calculation because there’s a different process for quoted shares and unquoted shares.

There’s another thing you need to know about when you are calculating the value of sweat equity shares. Under quoted shares, you need to know about the fair market value of the claims. You will find more information about the proper market value concept below.

Here’s the process to calculate the taxes on the quoted shares. It’s a simple and easy process that will help you file the correct amount when you file your taxes.

Taxable amount = Fair market value of the securities held by the employee on the date of exercising the option and the less amount paid by the employee.

This is the process of calculating the amount of the taxable shares of the sweat equity shares.

Calculation of Sweat Equity Shares in the Fair Market Value Way

Under Fair market value, your calculations of the taxable amount will be based on if the shares are quoted shares or unquoted shares.

Here is the way to calculate the quoted shares

Quoted amount in one exchange – the average of opening price and closing price of the share.

Quoted amount in more than one exchange – the average opening price and closing price in the stock exchange in which the highest volume of shares is traded.

If the sweat equity share is not a part of the stock exchange on the day of exercising this option, then there’s another way of calculating the taxable amount. It would be best to take the closing price on any of the stock exchange markets that the share is on. The date needs to be closest to the day when the taxable amount is calculated.

Here is the way to calculate the unquoted shares

The fair market value of the sweat equity shares will be determined or set by a merchant banker on the date of exercising an option of calculating your taxable amount. However, it can be on an earlier day too or within the time frame of 180 days. You can’t take the value of the shares beyond the time frame of 180 days.

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