How are ESOPs taxed — at exercise and at sale?

Stage 1 — at exercise (salary perquisite)

When you exercise, the perquisite = fair market value on the exercise date − exercise price you paid, taxed as salary (Section 17). Your employer includes it in Form 16 and deducts TDS.

Example: FMV ₹500, exercise price ₹100 → ₹400 per share is taxed as salary at your slab.

Stage 2 — at sale (capital gains)

When you sell, the capital gain = sale price − FMV that was taxed at exercise. Holding period runs from the exercise date. Listed shares: long-term after 12 months (12.5% over ₹1.25L); unlisted: after 24 months.

Example: sell at ₹700, FMV at exercise ₹500 → ₹200 per share is capital gain.

Startup employees — defer the exercise tax

Employees of an eligible startup can defer the Stage-1 tax up to 5 years / sale / leaving — see ESOP TDS deferral.

Foreign ESOPs

If the shares are of a foreign parent, you must also disclose them in Schedule FA (foreign assets) and consider foreign tax credit on sale.