Is there any tax when ESOPs are granted?

No. The grant of ESOPs creates no tax liability. Tax arises only at exercise and at sale.

What is the perquisite tax on ESOP?

The perquisite is the difference between the Fair Market Value (FMV) of the shares on the exercise date and the exercise price. This amount is added to the employee's salary income and taxed at the applicable slab rate under Section 17(2) of the Income Tax Act.

Who deducts TDS on ESOP perquisite?

The employer deducts TDS under Section 192 (IT Act, 1961) or Section 392 (IT Act, 2025, for exercises from 01/04/2026) in the month of exercise. If the employer does not deduct TDS, the employer faces interest at 1.5% per month and potential disallowance of the salary deduction.

What is the capital gains tax rate on ESOP shares in FY 2025-26?

For listed shares: 20% on short-term capital gains (held up to 12 months) and 12.5% on long-term capital gains (held more than 12 months), with the first Rs. 1.25 lakh of LTCG exempt per financial year. For unlisted shares: slab rate on short-term capital gains (held up to 24 months) and 12.5% without indexation on long-term capital gains (held more than 24 months). These rates reflect Budget 2024 amendments effective 23 July 2024.

Can an employee defer perquisite tax on ESOPs?

Employees of eligible startups can defer the perquisite tax. For shares allotted before 01/04/2026, the deferral window is 48 months from the end of the assessment year under Section 192(1C) of the IT Act, 1961. For shares allotted on or after 01/04/2026, the window extends to 60 months from the end of the Tax Year under Section 392(3) read with Section 289(3) of the IT Act, 2025. In both cases the deferred tax becomes payable at the earliest of the window expiry, the date of sale, or cessation of employment.

What are the eligibility conditions for the startup ESOP tax deferral?

Three conditions must all be met: (1) the company must be DPIIT-recognised, (2) it must satisfy Section 80-IAC conditions — incorporated as a Private Limited Company or LLP between 01/04/2016 and 31/03/2030, with turnover below Rs. 100 crore — and hold a valid IMB Certificate, and (3) the employer must have opted into the deferral scheme. DPIIT recognition alone is not sufficient. As of May 2026, only approximately 3,700 of 1.97 lakh DPIIT-recognised startups hold the IMB Certificate.

How is FMV determined for an unlisted company's ESOP?

Rule 3(9)(ii) of the Income Tax Rules requires a Category I Merchant Banker valuation, dated on or close to the exercise date. Internal DCF estimates or old funding round valuations are not acceptable. An understated FMV creates TDS default exposure for the employer and back-tax liability for the employee.

Does an employee need to report ESOP income separately in their income tax return?

The perquisite flows through Form 16 (or Form 130 under the IT Act, 2025) and appears automatically in the salary head of the ITR. The capital gain on sale must be separately reported in the capital gains schedule, using FMV at exercise as the cost of acquisition. Foreign ESOP shares must additionally be disclosed in Schedule FA each year.

Are foreign ESOPs taxable in India for Indian residents?

Yes. Both the perquisite at exercise and capital gains at sale are taxable in India under the same two-stage framework as domestic ESOPs. Employees who paid tax in the source country can claim a Foreign Tax Credit under the applicable DTAA, subject to filing Form 67 before the ITR due date. All foreign ESOP shares must be disclosed annually in Schedule FA of the ITR regardless of whether a tax event occurred in the year.

Are NRI employees taxed on ESOPs from an Indian company?

Yes. Shares in an Indian company are an India-sourced asset. Both the perquisite at exercise and capital gains at sale are taxable in India regardless of residential status. An NRI must use a PINS-linked NRI demat account to sell listed ESOP shares. Sale proceeds can be repatriated in full from an NRE account, or up to USD 1 million per financial year from an NRO account, subject to applicable taxes and Form 15CA/15CB filing.

Do I need to pay advance tax on ESOP capital gains?

Yes, if your estimated total tax liability for the year exceeds Rs. 10,000 after accounting for TDS already deducted at exercise. Capital gains earned after the 15 September instalment do not attract Section 234C interest provided the remaining tax is paid by 15 March. Section 234B interest still applies for underpayment of 90% of the annual liability by 31 March.

Can I set off a capital loss on ESOP shares against my salary income?

No. Capital losses can only be set off against capital gains, not salary or any other head of income. A short-term capital loss can offset both short-term and long-term capital gains in the same year. A long-term capital loss can only offset long-term capital gains. Unabsorbed losses carry forward for up to 8 assessment years, but only if the ITR is filed before the due date.

Can ESOP sale proceeds be reinvested to claim exemption under Section 54F?

Potentially yes. Section 54F allows exemption from long-term capital gains if the net sale consideration is reinvested in a residential house property — purchased within 1 year before or 2 years after the sale, or constructed within 3 years. The exemption is proportionate to the amount invested and is subject to conditions, including not owning more than one residential property at the time of sale.

What happens to the ESOP deferral when an employee leaves or is transferred abroad?

Cessation of employment with the eligible startup is a deferral trigger event. The deferred perquisite tax becomes payable within 14 days of the cessation date and the employer must deduct and deposit TDS at that point. Whether a deputation or secondment to a foreign entity constitutes cessation of employment at the Indian entity level is fact-specific and requires specific advice before the arrangement is structured.

What happens if an employee does not exercise their vested ESOP options?

Unexercised options lapse at the end of the exercise period. No tax arises on lapsed options and the company is not required to make any TDS deduction. The options return to the ESOP pool or are cancelled as per the plan document.

Can a company claim a tax deduction for ESOP expenses?

Yes. The perquisite value is a deductible salary cost in the year of exercise and allotment, contingent on the employer having correctly deducted and remitted TDS. Failure to deduct TDS may result in disallowance of the expense.

Can a company buy back ESOPs before they are exercised?

Yes. Some unlisted startups offer buyback programmes to provide liquidity before an IPO or secondary sale. Buyback proceeds are treated as salary income in the hands of the employee and TDS is deducted under Section 192 (or Section 392 from 01/04/2026). The amount is reflected in Form 16 or Form 130 and reported under salary income in the ITR.

What documentation must an employee maintain for ESOP tax purposes?

Employees should retain: the grant letter and vesting schedule, exercise confirmation, merchant banker FMV certificate (for unlisted shares), Form 16 or Form 130 showing the perquisite and TDS deducted, sale contract notes or demat statements for capital gains computation, and records of foreign taxes paid for employees holding foreign ESOPs. Employees using the deferral benefit should also retain the deferral election document and track the trigger event date.

How does ESOP taxation apply to promoters of a startup?

Promoters and promoter group members are generally ineligible to receive ESOPs under Rule 12(1) of the Companies (Share Capital and Debentures) Rules, 2014. However, DPIIT-recognised startups have a specific exemption: founders and promoters can be granted ESOPs for up to 10 years from incorporation, subject to shareholder approval. Outside this exemption, the scheme can only cover permanent employees, non-promoter directors, and key managerial personnel.

What is the consequence of a TDS default by the employer on ESOP perquisite?

Under Section 201 of the IT Act, 1961 (or the equivalent provision under the IT Act, 2025), the employer is treated as an assessee-in-default. Interest accrues at 1.5% per month from the date TDS should have been deducted to the date of actual payment. The employer may also lose the tax deduction on the perquisite as a salary expense.

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Home > Taxation > ESOP Taxation in India – Complete Guide for Founders & Startups [2026 Update]

ESOP Taxation in India – Complete Guide for Founders & Startups [2026 Update]

Written By

Priya Kapasi Shah, Rohit Gandhi

Published on

May 13,
2026

Last updated on

May 13, 2026
19:14

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ESOP Taxation in India – Complete Guide for Founders & Startups [2026 Update]

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May 13,
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May 13, 2026
19:14

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ESOP Taxation in India – Complete Guide for Founders & Startups [2026 Update]

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Published on

May 13,2026

Last updated on

May 13, 202619:14

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We helped Startups & Founders with ESOP Taxation

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May 13,
2026

May 13, 2026
19:14