The Bengaluru bench of the Income Tax Appellate Tribunal (ITAT) has ruled that consideration received from the buyback of vested but unexercised employee stock options cannot automatically be taxed as salary, in an order dated 31 July 2026. Where options have not been exercised, and no shares have been allotted, the proceeds may instead be taxable as long-term capital gains, the tribunal held.
The dispute concerned ₹2.33 crore received by Flipkart executive Pramod Kumar Jain after Flipkart Private Limited, Singapore, repurchased 2,653 vested stock options granted under the Flipkart Stock Option Plan, 2012. Jain had reported a gross salary of ₹1.90 crore and declared the buyback gains under the capital gains head in his income tax return.
The Assessing Officer treated the buyback proceeds as a salary perquisite under Section 17(2) of the Income Tax Act, relying on Form 16 and the employer’s tax deduction at source. That position was upheld by the Commissioner of Income Tax (Appeals) before the matter reached the tribunal.
The tribunal said the dispute hinged on whether vested but unexercised stock options could be regarded as a perquisite when no shares had been allotted, and concluded that the buyback consideration in such cases may be treated as long-term capital gains rather than salary.
The ruling adds to a contested area of Indian tax law. Earlier decisions across the Delhi, Karnataka, and Madras High Courts on compensation tied to Flipkart’s unexercised options produced divergent outcomes, classifying such payments variously as a perquisite, a capital asset, or a capital receipt, and leaving both employees and employers exposed to litigation risk.
The timing is notable for the wider workforce. Flipkart approved a second ESOP liquidity event in 2026, letting eligible staff cash out vested options at ₹713.4 per option, a corporate action that puts option taxation in front of thousands of employees.
