ESOP Taxation in India: Perquisite on Exercise and Capital Gains on Sale (2026-27)
CA Meet Dhrangadhariya 
June 18, 2026
CA Meet Dhrangadhariya June 18, 2026
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Last updated: 23 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
An employee stock option plan (ESOP) lets an employee buy the employer’s shares at a fixed price in the future. The Companies Act, 2013 calls it an employee stock option: a right, but not an obligation. ESOPs are taxed twice, at two different points, under two different heads. This post follows the Income-tax Act, 2025 and the Income-tax Rules, 2026, which apply from 01/04/2026.
| Term | Meaning |
|---|---|
| Grant date | The employer offers you the option |
| Vesting period | The time, or the milestones, before you may exercise |
| Vesting date | The date the option becomes exercisable |
| Exercise date | The date you tell the employer you will buy the shares |
| Exercise price | The price you pay per share, usually below the market price |
| Allotment | The shares are issued or transferred to you |
Nothing is taxed on grant or vesting. If the option lapses unexercised, there is no tax either.
Under section 17(1)(d), the value of any specified security or sweat equity share allotted or transferred by your current or former employer, free of cost or at a concessional rate, is a perquisite. The value is the fair market value on the date the option is exercised, less the amount you actually paid or that was recovered from you (section 17(4)(h)).
It is added to your salary and taxed at your slab rate. The employer deducts TDS on it under section 392 and shows it in your TDS certificate (Form 130).
| Situation on the exercise date | FMV |
|---|---|
| Share listed on one recognised stock exchange | Average of the opening and closing price on that exchange |
| Listed on more than one exchange | The same average, on the exchange with the highest trading volume |
| Listed but no trading that day | Closing price on the nearest earlier date (on the exchange with the highest volume if more than one) |
| Not listed | Value fixed by a Category I merchant banker registered with SEBI, as on the “specified date” |
| Specified security that is not an equity share | Merchant banker’s value on the specified date |
The “specified date” is the exercise date or any earlier date not more than 180 days before it. “Opening” and “closing” price mean the price of the first and the last settlement on the day, and where the exchange quotes buy and sell prices, the sell price.
If the employer is an eligible start-up under section 140 (the section that replaced section 80-IAC), the tax on this perquisite is not payable at exercise. The notice of demand makes it payable within 14 days of the earliest of:
The tax is worked out at the rates in force for the tax year of allotment, and the employer deducts or pays it within the same time (section 392(3)). The older rule used 48 months; the 2025 Act says 60.
When you later sell the shares, the gain after exercise is a capital gain.
| Shares | Short-term if held for | Short-term gain taxed at | Long-term gain taxed at |
|---|---|---|---|
| Listed in India, sale on a stock exchange with STT paid | 12 months or less | 20% (section 196) | 12.5% on the gain above ₹1,25,000 a year (section 198) |
| Listed in India, no STT paid | 12 months or less | Slab rates | 12.5% without indexation (section 197) |
| Unlisted Indian company | 24 months or less | Slab rates | 12.5% without indexation (section 197) |
| Foreign company’s shares | 24 months or less | Slab rates | 12.5% without indexation (section 197) |
Shares of a foreign company are not “listed on a recognised stock exchange in India”, so the 24 month period applies even if they are listed abroad.
You hold 2,000 options at an exercise price of ₹80. On the exercise date, 10/06/2026, the FMV is ₹150.
When shares are allotted, the employer must deduct TDS on a perquisite that you did not receive in cash. Many employers therefore sell part of the allotted shares on your behalf to pay the tax. That sale is itself a transfer, so it can give a small capital gain or loss (usually nil, because the price is close to the FMV used) that belongs in your return.
An employer, often an unlisted company, may buy back vested options before they are exercised so that employees get cash. Employers generally treat the payment as salary and deduct TDS. We could not find a specific provision for this in the Act, so treat the position as one to confirm for a large amount.
A resident is taxed in India on income from anywhere in the world. A non-resident is taxed only on income that is received in India or accrues or arises here, and salary for services rendered in India accrues in India. Stock options of a foreign parent can therefore be taxed in India even if the shares are bought and sold abroad. Foreign shares also have to be reported in the foreign assets schedule of the income-tax return.
Gains on sale are income of the year, so include them in your advance tax instalments once the sale has happened. Delay can attract interest, so pay the tax on a sale as soon as you know the gain.
No. The tax arises when the option is exercised and shares are allotted. If you let the options lapse without exercising them, there is no tax.
Fair market value of the share on the date you exercise the option, less the amount you paid or that was recovered from you (section 17(4)(h)). It is added to your salary and taxed at your slab rate, and the employer deducts TDS under section 392.
For a listed share, the average of the opening and closing price on the stock exchange on the exercise date (the exchange with the highest trading volume if listed on more than one). If there was no trade that day, the closing price on the nearest earlier day. For an unlisted share, the value fixed by a Category I merchant banker as on the exercise date or any date up to 180 days before it.
The FMV that was taken as the perquisite (section 73, Table serial 4). The holding period starts on the date of allotment.
If your employer is an eligible start-up under section 140, the tax on the perquisite becomes payable within 14 days of the earliest of three events: 60 months from the end of the tax year of allotment, sale of the shares, or your ceasing to be an employee.
No. The perquisite taxes the gain up to the exercise date, and the FMV on that date becomes your cost, so only the increase in value after exercise is taxed as a capital gain.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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