3 days ago

How India’s ESOP Tax Rules Work at Exercise and Sale

An ESOP gives an employee the right to buy company shares at a set price.

The option itself is not taxed when it is granted or when it becomes available.

Tax usually begins when the employee exercises the option and receives shares.

The difference between the share’s value and the price paid is treated like salary.

This can create a tax bill even before the employee has sold the shares or received cash.

When the shares are later sold, only the increase after the exercise-date value is treated as a capital gain.

The date the shares are allotted starts the clock for deciding whether the gain is short-term or long-term.

Some eligible start-up employees can delay tax collection, but they must eventually pay it.

Key facts

Tax points: Tax generally arises on exercise as a salary perquisite and on sale as capital gains.
Exercise valuation: The perquisite equals the fair market value on exercise minus the exercise price paid.
Cost of acquisition: The fair market value taxed as a perquisite becomes the shares’ cost of acquisition.
Listed long-term rate: For listed equity shares on which STT has been paid, long-term gains are taxed at 12.5% above the ₹1.25 lakh annual threshold.
Unlisted long-term rate: Long-term gains on unlisted shares are taxed at 12.5%, with no indexation.
Holding periods: Listed shares become long-term after more than 12 months; unlisted shares after more than 24 months from allotment.
Start-up deferral: Eligible DPIIT-recognised start-up employees may defer employer withholding until the earliest of specified events, including sale, departure, or the end of the deferral period.

thehindubusinessline.com · 3 days ago