Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
Taxed as a perquisite at issue
Sweat equity shares are shares a company issues for non-cash contribution — value added through effort, intellectual property or know-how, rather than money. When issued to an employee or director, the fair value of the shares (less any amount paid) is taxed as a perquisite (salary income) in the recipient’s hands, much like an ESOP at exercise. The FMV is determined by a merchant banker for unlisted shares.
Capital gains on sale
When the recipient later sells the sweat equity shares, the gain over the fair value already taxed is capital gains — long-term if held over 24 months (unlisted), else short-term. So, like ESOPs, there are two taxing points: perquisite at issue, capital gains at sale. Company-law limits and conditions apply to issuing sweat equity — confirm.
A worked example
Example: a startup issues a CTO 5,000 sweat equity shares (FMV ₹100, nothing paid) for building its platform — ₹5 lakh is taxed as a perquisite now. If she sells them in three years at ₹300, the ₹200 per share gain (₹10 lakh) is long-term capital gains. Sweat equity rewards contribution but carries an upfront tax, so plan for it. Our team can structure and compute sweat-equity issues.