ESOP taxation in India: what you pay at exercise, and again at sale

Arjun has 2,000 vested options with an exercise price of ₹10. He exercises when the FMV is ₹510 and sells 30 months later at ₹900. The company is unlisted.

He pays ₹3.12 lakh in the year of exercise without having sold a share. That cash gap is the main reason employees delay exercising, and the reason the startup deferral exists.

• Listed in India: the average of the opening and closing price on the exercise date on the exchange with the higher trading volume.
• Unlisted, or listed only abroad: the value determined by a SEBI-registered category I merchant banker, on a date not more than 180 days before the exercise date.

The same FMV becomes your cost when you sell, so the perquisite value and the later gain always add up to the total increase in value.

Employees of an eligible startup (DPIIT-recognised and holding the Inter-Ministerial Board certificate for the section 80-IAC deduction) do not pay the perquisite tax in the year of exercise. The employer deducts and pays it within 14 days of the earliest of:

• the end of the deferral period;
• the date you sell the shares;
• the date you leave the company.

The deferral period was 48 months under the 1961 Act. Under the Income-tax Act, 2025 (section 392(3) read with section 289(3)) it is 60 months for shares allotted on or after 1 April 2026. The tax is still computed on the FMV at exercise and at the rates of the exercise year; only the payment moves.

Shares listed only abroad count as unlisted for Indian tax. Rates are those applying to transfers from 23 July 2024.

• The perquisite is taxed in India when the RSUs vest or options are exercised, and the Indian employer deducts TDS. Sell-to-cover arrangements do not change this.
• If the foreign plan also withholds tax, claim credit for it by filing Form 67 before the ITR; see our guide on foreign income and tax credits.
• Residents must report the foreign shares, and the brokerage account holding them, in Schedule FA of the ITR on a calendar-year basis. Missing it carries a separate penalty.
• Dividends from the foreign company are taxable in India at slab rates.

ESOP sales and foreign assets mean ITR-2 (or ITR-3 with business income); ITR-1 cannot be used. Our ITR form selector confirms it.

• Exercise early if the FMV is still low. The perquisite is small when the gap between FMV and exercise price is small, and all later growth is taxed as capital gains at 12.5% after 24 months instead of at your slab rate.
• Watch the cash. You pay the exercise price and, unless the deferral applies, the tax on the perquisite in the same year, before you can sell. Ask whether the company offers a cashless exercise or a liquidity event.
• Leaving the company ends the deferral. Under the startup deferral, tax becomes payable within 14 days of your exit. Budget for it before resigning.
• Time the sale for the 24-month mark. For unlisted shares, selling at 23 months means slab-rate tax; waiting a month can cut the rate to 12.5%.
• Keep the merchant banker valuation and the allotment letter. They fix your cost for capital gains years later, when nobody at the company may remember the numbers.
• Check Form 16. The perquisite should appear in Form 12BA and in your Form 16; if it does not, raise it with payroll before filing. See our Form 16 guide.