What is Phantom Tax, How Does It Work?

In India, there is no Phantom Tax levied till now. We hope that continues, as that’s a benefit to the income drawn in any developing country like India.

In India, there’s no such thing as a Phantom Tax. There is always a discussion between the terms “Phantom Tax” and “Phantom Income. However, there is the concept of phantom income, which refers to income you are taxed on but haven’t received in cash yet.

So What is Phantom Income? 

A term coined to describe any taxable income that is existent yet not liquified. The owner of the income does not receive it in any form of cash transaction. Phantom income is a futuristic thought or calculated income that exists on paper or in the form of assets. This is generated on stocks, land value, apartment value, or any such income.

Also Read: Untangling the Myth: Do the Amish Pay Taxes

Understand phantom income through the below table. The situations any phantom income is generated is through: 

Partnerships and LLCsOwners taxed on profits even if reinvested
Debt forgivenessCancelled debt considered taxable income
Appreciation in investmentsTaxes owed on unrealized gains
Employer-provided benefitsHealth insurance for partner can be taxable income

For example : Phantom Income Sample: Profit Sharing in a Partnership (India)

Scenario: Sarat, a 33-year-old software engineer from Bengaluru, India, is a partner in a sales agency. The partnership agreement states a 50/50 profit sharing between Sarat and his co-founder.

Year-End Financials:

  • The partnership earns a net profit of ₹60,00,000 (Rupees Fifty Lakhs) for the year.
  • As per the agreement, Sarat’s share of the profit is ₹30,00,000 (Rupees Thirty Lakhs).

Phantom Income:

Sarat plans to invest those 30,00,000 back into the business without taking any cash out of it. It creates a phantom income for Sarat.

DescriptionAmount (₹)
Partnership Net Profit60,00,000
Sarat’s Profit Share30,00,000
Retained Earnings (Reinvested Profits)60,00,000

Even though Sarat didn’t receive any amount in-hand, on  his share of 30,00,000 he has to pay a tax. That is taxable income and is phantom tax.

Here’s a breakdown for new employees in India:

What is Phantom Income for a new employee?

Situations which are specific to new employees include:

Investments through Stocks: These days, many companies offer stocks to their employees besides their fixed pay. Stocks as compensation can generate phantom income if the company’s stock value grows with time. With time, the difference between what you paid for the stock (the stock purchase amount) and the fair market value (current market price) may increase and is considered for phantom tax as it’s from phantom income.  Without even selling any of the stock, the phantom tax may be levied on you.

Employee Stock Purchase Plans (ESPPs): Similar to stock options, ESPPs allow you to purchase company stock at a discounted rate. The difference between the discounted purchase price and the fair market value at the time of purchase can be considered phantom income.

Who is Affected by Phantom Income?

New employees who are given stocks or invest i ESPPs are affected by phantom income and phantom tax. SMEs and startups  usually play this kind of game. This trend continues in tech world.

What’s New with Phantom Income?

No changes were made by government in recent times. It is exactly the same, even after independence. No phantom tax is collected through any channel. But it’s important for real estate, new employees with stock options to be aware of the tax implications.

Planning Tips – Be Prepared for Phantom Income & Phantom Tax

Plan your phantom tax based on phantom income. Be aware of your multiple sources of income anytime with documentation. 

  • Estimate and Budget:

Action: Be aware of all the multiple income sources. Identify or hire a professional to identify all futuristic potential phantom income situations. Get an estimate of the taxable amount and factor it into your annual budget to avoid surprises in the coming taxation season.

  • Cash Flow Management:

Action: Floating cash can be a boon if you can anticipate your future income beforehand and be ready for the tax. To pay the phantom tax, you can not directly liquify the asset but can explore other sources of income such as loans, salary adjustments, etc.

  • Take The Advice of a Tax Professional:

Action: Best legal advice is always from a legal tax advisor. Hire a professional and take relevant help. Don’t let your phantom tax or phantom income become a burden for you. You can always minimise the tax cap levied on you(If possible) with the help of an advisor.


Phantom tax is levied on phantom income, which is only on paper or a futuristic thought. It’s in the shadow of some stocks, shares, land appreciation amount, apartment value, or some profit from partnerships. Be aware of all your assets and phantom income sources. So that you don’t get sudden shocks in the tax season from some unidentified phantom tax.

Be aware, Be tax free! Comment with your thoughts on the phantom tax.

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