The purpose of this article is to explain in brief, how ESOPs are taxed in India, from an employee’s perspective.

How are ESOPs taxed in India:

As an employee, your liability to pay tax from ESOPs arises on two occasions,

• first, when the shares are allotted upon exercising the vested options (taxed as salary income)
• second on sale of the shares allotted (taxed as capital gains).

Reference: https://www.capitalmind.in/2021/05/guide-to-employee-stock-options-esop-taxation-india/

1. On allotment of the shares (exercise of the option)

(FMV on exercise date - Exercise price) = Taxed as Perquisite of salary and taxed at tax rate, which is deducted by employer.

This is deducted from the monthly salary & cash flow reduces for that month.

Note- tax only arises on exercise of the option, not on allotment.

1. On sale - Long term or Short term capital gan tax arises basis on period of holding.

The Cost of Acquisition for calculating CG is the FMV on exercise date.

A relief that has been provided in the 2020 budget -

Employee need not pay this Tax arising on Op.1 till these 3 events:

• Expiry of five years from the year of allotment of ESOPs
• Date of sale of the ESOPs by the employee
• Date of termination of employment