Introduction

Employee Stock Option Plans (ESOPs) are a popular form of compensation in Indian start-ups, offering employees the opportunity to acquire company shares at a predetermined price. While ESOPs incentivize performance and align employee interests with company growth, they also carry tax implications. The Permanent Account Number (PAN) plays a critical role in tracking and managing these tax obligations. From TDS deduction to reporting in income tax returns, PAN ensures that ESOP transactions are properly linked, recorded, and taxed in accordance with Indian income tax laws.

1. PAN as the Tax Identity for ESOP Holders

PAN is a mandatory requirement for employees receiving ESOPs. It ensures that the tax authorities can identify the individual and monitor the associated income, especially when stock options are exercised or sold. Without PAN, tax compliance for ESOP transactions becomes impossible.

2. Taxation of ESOPs at the Time of Exercise

When an employee exercises the ESOP—i.e., purchases the shares at a predetermined price—the difference between the fair market value and the exercise price is considered a perquisite and taxed as part of salary income. The employer must deduct TDS and report the amount under the employee’s PAN.

3. Reporting of TDS Through PAN

Employers report TDS on ESOPs via Form 16 and in quarterly TDS returns using the employee’s PAN. This amount is reflected in the employee’s Form 26AS, allowing the individual to claim TDS credit while filing their income tax return.

4. PAN for Capital Gains Tax on Share Sale

When the ESOP shares are eventually sold, any gain is taxed under Capital Gains. The transaction is reported using PAN, and the sale details are reflected in the Annual Information Statement (AIS). This helps the Income Tax Department assess capital gains and verify return accuracy.

5. PAN for Start-up Tax Deferment Option

Recognized start-ups can offer a tax deferment on ESOPs under Section 192(1C) of the Income Tax Act. In such cases, tax payment on the perquisite value can be deferred up to five years or until the employee sells the shares. PAN is essential for tracking the deferred tax and linking it to future tax events.

6. Linking PAN with Demat and Bank Accounts

To receive ESOP shares, employees need a demat account, which requires PAN. Additionally, sale proceeds from the shares are credited to a PAN-linked bank account, ensuring traceability and proper capital gain reporting during ITR filing.

7. Claiming Deductions and TDS Credits

Employees can use their PAN to claim any excess TDS deducted on ESOPs as a refund during return filing. The PAN ensures that all tax credits are accurately matched with the individual’s profile and adjusted against total tax liability.

8. Avoiding Higher TDS Without PAN

If the employee does not provide PAN to the employer or during share sale through a broker, TDS may be deducted at a higher rate of 20% instead of the applicable rate. Hence, furnishing PAN is essential to avoid excess tax deduction.

9. PAN-Based Compliance and Verification

All ESOP-related filings by the employer—including salary statements, Form 12BA, and TDS certificates—are filed using the employee’s PAN. This creates a reliable audit trail and supports quick verification by the Income Tax Department in case of assessments or inquiries.

10. Record Maintenance and Legal Documentation

For start-ups undergoing due diligence, merger, or funding rounds, the capitalization table, ESOP issuance, and tax documents are all PAN-linked. This ensures transparency and legal compliance for both the employer and the employee.

Conclusion

PAN is indispensable in the taxation and regulatory management of ESOPs in Indian start-ups. It links salary perquisites, capital gains, TDS deductions, and refunds under one identity, ensuring transparency, accuracy, and compliance with tax laws. Employees receiving ESOPs must ensure their PAN is updated with their employer, demat account, and income tax portal to avoid tax errors and benefit from timely credits or deferments. For start-ups, using PAN-based systems for ESOP administration strengthens corporate governance and investor confidence.

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