How Are ESOPs Taxed in India


The utilization of Employee Stock Options (ESOPs) has surged in prominence as an integral facet within employee compensation schemes, particularly within the domains of technology and startups. ESOPs extend to employees the chance to possess a stake in the company they are employed by, harmonizing their vested interests with the advancement and prosperity of the company. Yet, parallel to the potential advantages, grasping the taxation nuances of ESOPs holds paramount significance for both the employees and the employers. In the Indian context, ESOPs are bound by distinct tax regulations that dictate their taxation methodology.

Understanding ESOPs

ESOPs, also known as Employee Stock Ownership Plans, allow employees to acquire a certain number of shares in the company they work for. These shares are usually offered at a predetermined price, known as the exercise price, which is often lower than the market price at the time of issuance. ESOPs are typically subject to a vesting period, during which employees must remain with the company before they can exercise their options and acquire the shares.

Taxation of ESOPs

The taxation of ESOPs in India is determined by considering two key stages: the allotment or vesting stage and the sale of shares stage.

Allotment/Vesting Stage:

At the time of allotment or vesting, ESOPs are considered as a perquisite or a fringe benefit and are thus subject to taxation under the head of “Income from Salaries.” The taxable amount is calculated as the difference between the Fair Market Value (FMV) of the shares on the date of vesting/allotment and the exercise price paid by the employee.

The FMV is determined using the following formula:

FMV = (Fair Market Value per share – Exercise Price per share) x Number of shares allotted or vested

It’s important to note that the FMV should be based on the actual market price of the shares on the date of vesting/allotment. If the shares are listed on a recognized stock exchange, the average of the opening and closing prices on the date of vesting/allotment should be considered. For unlisted companies, the valuation must be done as per the guidelines provided by the income tax authorities.

The taxable value of ESOPs is added to the employee’s total income for the financial year in which the shares are vested/allotted. The employer is responsible for deducting the appropriate tax amount, including applicable surcharges and cess, and depositing it with the government.

 Sale of Shares Stage

Once an employee decides to sell the shares acquired through ESOPs, any profits made from the sale are categorized as capital gains and are consequently subjected to taxation under the category of “Capital Gains.” The tax implications vary based on how long the employee held the shares.

Short-term Capital Gains (STCG): If the shares are held for less than 24 months from the date of allotment/vesting, the gains are classified as short-term capital gains. They are included in the employee’s total income and taxed according to the individual’s applicable income tax slab.

Long-term Capital Gains (LTCG): If the shares are held for 24 months or more from the date of allotment/vesting, the gains are classified as long-term capital gains. As of the knowledge cutoff in September 2021, LTCG on listed equity shares are taxed at 10% (without indexation) if the gains exceed ₹1 lakh in a financial year. However, it’s essential to verify the prevailing tax rates and regulations as they might have changed since then.

Special Cases and Exemptions

There are a few scenarios in which the taxation of ESOPs can be different:

Employee Leaving the Company

If an employee leaves the company and decides not to exercise the vested options, no tax liability arises at that point. However, if the employee chooses to exercise the options later, taxation will be applicable at the time of exercise.

Merger or Acquisition

In the case of mergers, acquisitions, or reorganizations, the treatment of ESOPs depends on the specific circumstances. Employees may need to consult tax professionals to understand the implications of such events on their ESOPs.

Stock-for-Stock Swap

In some cases, companies might offer a stock-for-stock swap, allowing employees to exchange their vested ESOPs for shares of the acquiring company. The tax implications of such swaps should be carefully assessed.

Startups and Unlisted Companies

ESOPs offered by startups and unlisted companies have additional considerations for determining FMV and complying with valuation guidelines. Tax implications in these cases can be complex and consulting experts is advisable.


Employee Stock Options provide employees with a sense of ownership, a stake in the company’s success, and the potential for financial gain. However, understanding the taxation of ESOPs is vital to avoid unexpected tax liabilities. From the allotment stage to the sale of shares, different taxation rules apply. Therefore, employees who benefit from ESOPs, as well as employers offering them, should be well-versed in the tax regulations surrounding ESOPs in India. To navigate these regulations effectively, seeking professional tax advice is recommended, ensuring compliance and maximizing the benefits of ESOPs.


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