In India any stocks given to employees are treated as perks and taxed as such. While selling you incur capital gains taxes. Generally the tax for perks are taken care of by employer and the capital gains tax by employee. Here are the way the taxes need to be computed.
You get stocks from employer in generally 3 ways.
RSU Stocks are alloted to you with a vesting schedule. As and when the vesting date approaches you get full stocks. Here the market rate on the day of vesting will be treated as the perk given to you by the company. For e.g., if you get 100 shares at Rs10 per share, your perquisite is Rs1000. Company will pay tax on this Rs1000 depending on your tax slab. Generally most companies recover this by selling a portion of your shares in the market. If the tax you need to pay is Rs300, the company might sell 30 shares and give you 70 shares. For those 70 shares your cost of acquisiton will be Rs10. For the 30 shares that were sold, there might be capital gain consideration. If 30 shares are sold at Rs11 due to gain in the market by the time the sale is initiated, you have a capital gain of Rs30. This is short term capital gain as the period of acqisition starts from the day of vesting. If the company recoversthe tax from your salary, then you will get all 100 shares and the cost of acqisition will be Rs10 per share.
Options They work similar to RSUs but generally you need to pay the option price for owning the shares. Say if you are granted 1000 shares at an option price of Rs5, there will be a fixed duration in which you can exercise your option. If the price reaches Rs15 and you decide to exercise, You have to pay Rs5000 to get those 1000 shares. Since the actual value is Rs15000, the difference is treated as perquisite and tax will be paid by employer in a way similar to RSUs explained above. So you will have few shares given to you and few shares sold to cover tax. You will have capital gains consideration for the shares that are sold. For all the shares the cost of acquisition will be Rs15 (the market price). If the tax is recovered from salary you will be given all the shares and capital gains consideration will be there only when you sell the shares. An important note here is the taxes are deducted only when you exercise the option. If you never exercise the option, you never receive any shares and pay any tax.
ESPP Purchase plans work by collecting some money from employees and alloting shares at a fixed time during a year. generally these shares are given at a discount to market price. This discount is treated as perquisite and company pays tax over it. If the company recovers the tax from you, it will be similar to the way as explained for RSU and Options.
Important thing to remember is that the cost of acquistion is always the market price which will be notified by the company while alloting the shares to you. If the company sells few shares to recover tax, there will be short term capital gains considerations for those stocks that were sold. there might even be capital losses which you can use to offset any other capital gains you may have.
Once you have those shares in your hands, the treatment will be like any shares. When you sell, if you pay STT, the short term capital gains will be taxed at 15% (in FY 2012-13 when this was written) and at 0% tax for long term capital gains. If you don't pay STT (for foreign shares and off market transactions), STCG will be added to the salary and taxed as such and LTCG will be taxed either at 10% or at 20% after indexation applied.
For foreign stocks, the cost of acquisiton and sale amounts need to be computed in a specific way which I will address in next post.
