Individual Updated Tax Filing Plan having Capital gain (ESOP’s and RSU) (ITR-U)

ESOPs (Employee Stock Ownership Plans) and RSUs (Restricted Stock Units) are forms of employee compensation offered by companies. ESOPs give employees the right to purchase company shares at a predetermined price, while RSUs grant employees a specific number of shares once certain vesting conditions are met.

ESOPs and RSUs are subject to taxation at two stages: (1) at the time of exercise or vesting, and (2) at the time of sale. The difference between the fair market value (FMV) of the shares at the time of exercise or vesting and the price paid by the employee is treated as a perquisite and added to the individual's taxable income. Subsequently, any capital gains arising from the sale of the shares are also taxable.

Normally, the taxation of the ESOPs and RSU happens twice i.e. the first time is when they are issued/ exercised by the employees and the second time is when they are sold in the open market.

At the time of exercise or vesting, the difference between the FMV of the shares and the price paid by the employee is treated as a perquisite or employment income. It is subject to taxation as part of the individual's income for the respective financial year.

The capital gain from the sale of ESOPs or RSUs is classified as a long-term or short-term capital gain, depending on the holding period. If the shares are held for more than 24 months, it is considered a long-term capital gain and taxed at a lower rate. If the holding period is less than 24 months, it is considered a short-term capital gain and taxed at the applicable income tax slab rate.

In the Union Budget 2022, a new scheme was introduced relating to updated Income Tax Returns (ITR-U) which permits the correction of any errors or omissions made while filing ITR within two years (from the end of the relevant assessment year) after the filing along with the payment of additional taxes as per section 139(8A) read with section 140B of the Income Tax Act.

Under the new scheme, individuals can make corrections or amendments to their filed ITR within two years from the end of the relevant assessment year. This means that if a taxpayer filed their ITR for the assessment year 2022-2023, they have two years from the end of that assessment year (i.e., until the end of the assessment year 2024-2025) to make corrections. The taxpayer is required to pay any additional taxes resulting from the corrections along with interest, if applicable.

The updated ITR-U scheme allows taxpayers to rectify any errors or omissions made while filing their original ITR. This includes correcting mistakes in income details, deductions claimed, tax calculations, or any other information provided in the original ITR. It provides an opportunity to ensure the accuracy and completeness of the tax return.

While there is no specific penalty for making corrections under the updated ITR-U scheme, taxpayers are required to pay any additional taxes resulting from the corrections. Additionally, if the additional taxes are not paid within the specified timeframe, interest may be applicable as per the provisions of the Income Tax Act.

No, the updated ITR-U scheme allows corrections only for the relevant assessment year within the specified two-year window. It does not provide the facility to make corrections to multiple years' ITRs simultaneously. Corrections can be made for one assessment year at a time within the applicable timeframe.

No, it is not mandatory to use the updated ITR-U scheme for making corrections to your filed ITR. Taxpayers have the option to rectify errors or omissions in their ITR through the regular process of filing a revised return within the applicable timeframe as provided under section 139(5) of the Income Tax Act. The updated ITR-U scheme provides an additional opportunity for correction, but it is not mandatory.