ESOPs in India are taxed at two points. At exercise, the share's fair market value minus the price you pay is salary, taxed at your slab through your employer's TDS; at sale, any rise above that value is a capital gain, taxed by listed or unlisted rules.
When are ESOPs taxed, and on what value?
Nothing is taxed at grant or vesting. On exercise, the fair market value that day, less the amount you pay, is a perquisite taxed as salary under section 17(1)(d) of the Income-tax Act, 2025 (section 17(2)(vi) of the 1961 Act), with TDS by your employer under section 392 (section 192 of the 1961 Act).
Fair market value is a SEBI-registered merchant banker's valuation, dated up to 180 days before exercise, for an unlisted company, and the average of that day's opening and closing price for a listed one.
When you sell, your cost is that same fair market value, not the strike (section 73 of the 2025 Act; section 49(2AA) of the 1961 Act), so the part taxed as salary is not taxed again. The holding period runs from allotment.
How much tax does Nisha pay on 1,000 options?
Nisha earns ₹45 lakh CTC at a late-stage start-up: on the structure in CTC vs in hand salary, a gross salary of about ₹41,30,700, or about ₹2,53,000 a month in hand. Her taxable salary, about ₹40,55,700, is already in the 30% slab (new regime, FY 2026-27).
She exercises 1,000 vested options at a ₹100 strike when fair value is ₹600:
- Strike: 1,000 × ₹100 = ₹1,00,000
- Perquisite: (₹600 − ₹100) × 1,000 = ₹5,00,000, taxed as salary
- Tax at 30% plus 4% cess (31.2%): ₹1,56,000
Her total income, about ₹45,55,700, stays under the ₹50 lakh surcharge line. Her employer takes this ESOP perquisite tax as TDS, about 62% of her monthly in-hand, before she can sell a share: exercising costs ₹2,56,000 in cash.
Thirty months later she sells at ₹900 in a secondary sale. Her ESOP capital gains are (₹900 − ₹600) × 1,000 = ₹3,00,000. Unlisted shares held more than 24 months are long-term, taxed at 12.5% without indexation (section 197 of the 2025 Act; section 112 of the 1961 Act): ₹39,000 with cess. In all she pays ₹1,95,000 of tax on an ₹8,00,000 rise and keeps ₹6,05,000 of the ₹9,00,000 (after the ₹1,00,000 strike and that tax).
The same ₹5,00,000 costs ₹1,15,700 (23.1%) at an ₹18 lakh gross salary. From about ₹45.75 lakh gross it pushes income past ₹50 lakh, where a 10% surcharge falls on the whole year's tax, softened by marginal relief just above the line: at ₹48 lakh it costs ₹2,75,340 (55.1%), as tax on bonus works out for a same-size bonus.
How is the sale taxed: listed or unlisted, short or long?
Her ₹3,00,000 gain under each rule at FY 2026-27 rates (the sale year's rates apply), with 4% cess and income under ₹50 lakh:
| Shares | Held | Rate | Tax on ₹3,00,000 |
|---|---|---|---|
| Unlisted | 24 months or less | Slab (30% for Nisha) | ₹93,600 |
| Unlisted | Over 24 months | 12.5%, no indexation | ₹39,000 |
| Listed, sold on a stock exchange | 12 months or less | 20% | ₹62,400 |
| Listed, sold on a stock exchange | Over 12 months | 12.5% above ₹1.25 lakh | ₹22,750 |
Listed gains fall under sections 196 and 198 of the 2025 Act (111A and 112A of the 1961 Act), at these rates since 23 July 2024; the ₹1.25 lakh exemption is shared with your equity fund gains.
Listed shares can usually be sold once they reach your demat account, unless your plan sets a lock-in or a trading window covers you, so selling some can pay the strike and tax. Listed-company plans follow SEBI's 2021 share-based benefits regulations; a foreign parent's shares are not covered here.
Can an eligible start-up defer the tax?
Yes, but the start-up tax deferral changes only the date, under sections 392(3) and 289(3) of the 2025 Act (192(1C) and 156(2) of the 1961 Act). Eligibility under section 140(16)(b) of the 2025 Act (80-IAC of the 1961 Act) needs incorporation between 1 April 2016 and 31 March 2030, turnover of no more than ₹300 crore in a year (since 1 April 2026; ₹100 crore before) and an Inter-Ministerial Board certificate; many late-stage start-ups fail one, so ask HR.
Had Nisha's employer qualified, she would have paid only the ₹1,00,000 strike at exercise. The ₹1,56,000, still at FY 2026-27 rates, would fall due 14 days after the earliest of 31 March 2032 (60 months after that tax year ends), her sale, or her last day there. Selling at 30 months, she would pay it alongside the ₹39,000 on the gain. Resigning brings it forward, as ESOPs if you leave before vesting works through.
Do you owe advance tax on the sale?
The perquisite is salary, so your employer's TDS covers it. The capital gain is yours to pay: if the year's tax left after TDS is ₹10,000 or more, as Nisha's ₹39,000 is, advance tax applies (section 404 of the 2025 Act; section 208 of the 1961 Act). A gain made after an instalment date carries no interest for past instalments if its tax is paid in the remaining ones, or by 31 March, as advance tax for salaried explains.
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Frequently asked questions
This is general information for salaried individuals in India, not personalised financial advice.
