ESOP Taxation in India: A Complete Guide for Employees

In the corporate world, you might have heard of ESOPs – Employee Stock Options, or you would have got the ESOPs from your company, but if you are planning to sell it & don’t know the tax consequences on sale, then this article is for you.

Employee Stock options are incentives given by a company to its employees by giving an option to buy company shares at a predetermined price, often lower than the market value. This aligns employee interests with the company’s goals and vision.

TAX STAGES OF ESOP SCHEME

ESOP taxation in India has three distinct stages: Grant, Exercise, and Sale.

Vesting period in an ESOP is the timeframe an employee must remain with a company to earn the right to buy or own their allocated stock options

Let’s decode each stage

Stage: 1 Grant

At the time of the grant, there is no tax liability.

Stage: 2 Exercise

Under Section 17 of the Income Tax Act 1961, upon exercise, the gap between the share’s fair market value on the exercise date and the price actually paid by the employee is treated as a salary perquisite & has been taxed at relevant slab rates under the head of ‘salary’. 

Perquisite Value = FMV* on Date of Exercise − Exercise Price

*How is FMV determined?

• For listed shares: closing price on the exercise date on the recognised stock exchange.
• For unlisted shares: valuation by a Merchant Banker as of the exercise date.

Note: Under Section 192 of the Income Tax Act, 1961, any company responsible for paying salary must deduct TDS from the salary paid to the employee. As perquisites form part of salary, ESOP perquisite income is covered within this TDS obligation.

Stage: 3 Sale

The shares allotted to an employee under an ESOP are considered a capital asset. Capital gain on the sale of such shares will be computed as follows:

TAX RATES ON CAPITAL GAINS FOR FY 25-26

Period of holding for Listed Shares is 12 Months & for Unlisted shares is 24 Months.

SPECIAL PROVISION: STARTUP TAX DEFERRAL

Under Section 80-IAC, Eligible startups can defer payment of the perquisite tax arising from ESOP exercise for the earliest of the following events:

1. Up to five years from the date of allotment
2. Date of Sale of shares
3. Date on which the employee leaves the organisation

Note: This is a deferral, not an exemption. The tax amount remains the same; only the payment timing is delayed.

ITR 3 comprises a schedule of “Tax deferred on ESOP” to report information on tax deferred on ESOPs received from eligible startups referred to in Section 80-IAC.

WHICH ITR FORM SHOULD YOU USE

WHERE TO REPORT IN ITR?

• The perquisite value from ESOP: Under the Schedule of Salary
• The capital gain or loss from the sale of shares: Under Schedule CG (Capital Gains)

ILLUSTRATIVE EXAMPLE

Mr A is employed at ABC ltd & Company and has been offered 1000 ESOPs @ 80 on 01/04/2020. Which was exercised by him on 17/03/2026 (FMV on date of Exercise is Rs. 200). Out of which he sold half of the shares on 15/04/2026 for Rs 250, and the remaining shares were sold on 29/03/2027 for Rs 290. Calculate the taxable income for the respective FY.

Solution:

Grant date: 01/04/2020 – No Tax consequences

Exercise Date: 17/03/2026 (FY 25-26)

Calculation of Taxable Income for FY 25-26/AY 26-27

First Sale date: 15/04/2026(TY 26-27)

Calculation of Taxable Income for TY 26-27

Second Sale date: 29/03/2027(TY 26-27)

 CONCLUSION

It’s important to know the correct treatment of ESOPs at the correct time; otherwise, one can face serious notices & penalties. Hence, before filing your ITR, keep track of any abnormal transactions, such as those related to ESOPS, in order to reduce unnecessary notices.