How ESOPs are taxed in India

There is no tax when the company grants you options, and none when they vest. Tax starts when you exercise, that is, when you pay the strike price and receive shares. A second tax arises later, when you sell those shares at a profit.

So there are two separate events and two separate tax calculations. Employees are often surprised because the first tax falls due even though they have received only shares, with no cash in hand.

The tax authority treats the benefit of buying shares below their market value as a perquisite, which is a non-cash benefit from your job. It is added to your salary and taxed at your income tax slab rate. The benefit is the fair market value (FMV) of the share on the exercise date, minus the strike price you paid, multiplied by the number of shares.

For shares of an unlisted company, the FMV is worked out by a merchant banker using the method set out in the income tax rules. The employer deducts tax at source (TDS) on this amount through payroll, so you may see a large tax bill in the month you exercise.

Because this is added to salary, a big exercise can push you into the highest slab. Plan the timing of exercise with a chartered accountant, particularly if you hold many vested options.

Yes, in some cases. Employees of eligible startups can postpone paying the perquisite tax. The company needs to be recognised by DPIIT (the Department for Promotion of Industry and Internal Trade) and must also hold the certificate that qualifies it for the Section 80-IAC tax holiday. Recognition alone is not enough, and only a small share of recognised startups hold that certificate.

The deferral ends at the earliest of three events: a fixed number of months after the end of the assessment year in which the shares were allotted, you leaving the company, or you selling the shares. The period has been 48 months, and some practitioner sources say the new Income-tax Act, 2025 uses 60 months, which is not confirmed in the official text we checked. Check the period that applies to your allotment year.

This is a postponement. The tax is still due, and it is computed on the values and rates of the year of allotment, not the year when you eventually pay. Ask your HR team whether your employer qualifies before you exercise.

When you sell, the gain is the sale price minus your cost. Your cost is the FMV that was taxed as a perquisite at exercise, not the low strike price. This stops the same gain from being taxed twice.

The rate depends on how long you held the shares. As of October 2026, unlisted shares held for more than 24 months give a long-term capital gain, taxed at 12.5 percent without indexation. If you sell within 24 months, the gain is short term and taxed at your normal slab rate. Listed shares are different: they need more than 12 months for long-term treatment, the long-term rate is also 12.5 percent, and gains up to ₹1.25 lakh a year on listed equity are exempt.

Sources differ on whether the holding clock starts at exercise or at allotment. For most plans these are the same date, but confirm for your case.

After an IPO, the shares are listed. When you sell on the exchange, securities transaction tax applies and the listed-share rates above are used. The holding period counts from the date you acquired the shares at exercise.

Many IPO companies also have a lock-in on pre-IPO shares, so employees may be unable to sell for some months. Tax is triggered by the exercise, not by the listing, so a perquisite may be due long before you can sell.

If you are an Indian resident employee of an Indian subsidiary but your options are in a foreign parent company, different rules apply, including reporting foreign assets in your tax return. If you move abroad, your residency decides which country taxes you and how. These cases are complex and need professional advice.

Three habits help. First, ask your employer for the FMV, the strike price and the TDS plan before you exercise, so you know the cash needed. Second, work out whether exercising early or waiting for a liquidity event gives a lower overall cost, given your exercise window. Third, keep records of your grant letter, exercise form, valuation certificate and payslips, because you will need them when you sell.

Tax rules change with each Budget, and the Income-tax Act, 2025 has renumbered sections. This guide is general information, not tax advice, so confirm figures with a chartered accountant.