ESOP, otherwise known as Employee Stock Ownership/Option Plans, serves as a powerful and effective strategy for companies seeking to ensure their employees feel a greater sense of involvement and investment in the business. These plans work by offering employees an actual stake in the company, typically through the distribution of shares. In doing so, ESOPs create a unique and dynamic workplace culture where each employee is driven by a shared purpose of contributing to the company’s overall success. This not only provides staff with tangible financial benefits but also fosters a sense of unity and a common goal that can be highly motivating. Hence, ESOPs can be a valuable tool for both employee satisfaction and business growth.
What are ESOPs?
ESOP is an employee benefit plan provided by an employer to its employees. ESOP allows an employee to buy a stock of their company at a below-market price. It also offers ownership interest to employees. A company may issue ESOPs in the form of direct stock, profit-sharing plans, or bonuses. Below is a brief process for the issue of ESOPs:
- The company or employer decides to issue ESOPs
- The employee opts to exercise the ESOP i.e. buy the shares
- The employee sells the shares
Before granting ESOPs to employees, an employer needs to follow rules and regulations relating to ESOPs as per the Companies Act 2013.
| ESOP Terms | Meaning |
| Grant Date | The date on which the employer and employee agree to provide the employee with the option to acquire shares of the company. |
| Vesting Date | Date on which the employee is entitled to buy shares. |
| Vesting Period | The period between the grant date and the vesting date. |
| Exercise Period | The duration during which an employee may purchase vested shares. |
| Exercise Date | The Date on which the employee exercises the stock option. |
| Exercise Price | The Price at which the employee exercises the stock option. |
Tax Implications of ESOPs
ESOPs are taxed in the following two instances:
At the time of Purchase/Exercising
When an employee exercises the stock option i.e. agrees to buy the shares, it will be considered as a prerequisite under salary. The shares are credited to a Demat Account of an employee once shares are purchased. Here is the tax treatment for tax on purchase of shares under ESOP:
- The exercise of the stock option is treated as a Perquisite under the income head ‘Salary’
- Perquisite amount is the difference between FMV as on exercise date and exercise price.
- Prerequisite will be taxed in the year in which the employee exercises the ESOP
- The employer will deduct TDS on such amount and issue Form 16 to the employee
- The employee must report it as Salary Income in the ITR, claim TDS Credit, and pay tax on such income at slab rates.
Example
Neha, an employee at Zomato, was granted ESOP options during the financial year 2023-24. She opted to exercise her right to purchase shares of the company on 07/07/2023, acquiring a total of 2000 shares at a price of INR 120 per share. The FMV of these shares at the time of exercise was INR 165 per share. Following are the tax implications of the above transaction.
Purchase Price: INR 120
FMV: INR 165
Perquisite: INR 45 (165-120)
Taxable Perquisite Amount: INR 3,30,000 (2000*165)
Now the company will treat INR 3,30,000 as a taxable salary and will deduct TDS on the same. While filing her ITR, Neha needs to report INR 3,30,000 as Perquisites under the head Income from Salaries.
Budget 2020 Amendment
Under Budget 2020, the finance minister announced to defer TDS or tax payment on shares allotted by startups to their employees under ESOPs. Thus, from FY 2020-21 onwards, when an employee receives ESOPs from an eligible startup, they need not pay tax in the year of exercising the option. The employer can defer the deduction of TDS on the perquisite amount up to the occurrence of the following events whichever is earlier:
- Expiry of 5 years from the year of allotment of ESOP
- Date of sale of ESOP by the employee
- Date of termination of the employment
At the time of Sales/Transfer
When an employee sells the shares, it is treated as Capital Gains. Here is the tax treatment for tax on the sale of shares under ESOP:
- The amount of Capital Gain is the difference in Sale Price and FMV as on the exercise date
- The period of holding is calculated from the exercise date up to the date of sale
- Capital Gains will be taxed in the financial year in which the employee sells the shares
- The employee must report it as Capital Gains in the ITR and pay tax on such income at applicable rates below
Moreover, in the case where an employee possesses ESOPs from a foreign company, the tax treatment is similar to that of domestic securities. However, it is mandatory for them to disclose their holdings under Schedule Foreign Assets (FA) when filing their ITR.
| Type of Share | Period of Holding | Capital Gain | Tax Rate |
| Listed Shares | <= 12 months | STCG u/s 111A | 15% |
| > 12 months | LTCG u/s 112A | 10% in excess of INR 1 lakh | |
| Unlisted Shares | <= 24 months | STCG | slab rates |
| > 24 months | LTCG u/s 112 | 20% with Indexation |
Example
If we continue the above example, Neha sold her ESOPs on 20/01/2024.
Date of Exercising the ESOP i.e. Purchasing Shares: 07/07/2023
FMV as on 07/07/2023: INR 165
Sales Price as of 20/01/2024: INR 225
Here the tax treatment and calculation of tax liability will be as follows:
Neha must pay tax on Capital Gains in FY 2023-24 on the sale of shares.
- Period Of Holding – 07/07/2023 to 20/01/2024 i.e. less than 12 months
- Type of Capital Gain – Since the shares are of a company listed on a recognized stock exchange in India and the period of holding is less than 12 months, it is a Short Term Capital Gain.
- Tax Rate – The applicable tax rate is 15% under Section 111A
- Capital Gain per share = Sales Price – FMV = 225 – 165 = INR 60 per share
- Total Capital Gains = 2000 shares * 60 per share = INR 1,20,000
- Tax Liability = INR 1,20,000 * 15% = INR 18,000
How to calculate FMV for ESOPs?
| Type of Share | Meaning | Trading Status | Fair Market Value (FMV) |
| Listed Shares | Listed on a recognized stock exchange in India | Traded on a recognized stock exchange as on the exercise date | Average of opening and closing price |
| Listed Share | Listed on a recognized stock exchange in India | Not traded on a recognized stock exchange as of exercise date | Closing price on the date preceding the exercise date |
| Unlisted Share | Not listed on a recognized stock exchange in India | NA | Price determined by a merchant banker |
Treatment of Loss from Sale of ESOPs
The loss on sale of shares received in the form of ESOPs is a Capital Loss.
- The loss on sale of listed shares held for more than 12 months or unlisted shares held for more than 24 months is a Long Term Capital Loss. As per the income tax rules for set off and carry forward of losses, the taxpayer can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. Further, they can carry forward the remaining loss for 8 years and set off against LTCG only.
- The loss on sale of listed shares held for up to 12 months or unlisted shares held for up to 24 months is a Short Term Capital Loss. The taxpayer can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Further, they can carry forward the remaining loss for 8 years and set off against both STCG and LTCG.
FAQs
According to Rule 12(1) of the Companies (Share Capital and Debentures) Rules, permanent employees of a company, whether working within or outside of India, are eligible for Employee Stock Ownership Plans (ESOPs). However, individuals who serve as independent directors or who are associated with the promoter group are not eligible to receive ESOPs.
The taxpayer must report perquisite under salary income on exercising the ESOP. Further, they must report it as Capital Gains on the sale of shares. If a taxpayer owns ESOPs/RSUs of a foreign company, they must report it as a foreign holding under Schedule FA i.e. Schedule Foreign Assets in the Income Tax Return.
The employee has a right to exercise the ESOP on the exercise date. However, if the employee does not exercise the same, there is no tax implication on the same.
Hey @riya_gupta
Yes, you can claim all the TDS Deducted by your employer while filing ITR. If the deducted TDS is more than your total tax liability then refund of the same will be issued once filed ITR is processed by the IT Department.
Read more about ESOP Taxability here
Hi @Jammu_Kashmir_Unity
First, ensure that you have all the necessary documents and proof regarding the TDS deductions and deposits. Keep a record of the TDS certificates and any communication you’ve had with the deductee organization and the IT Department.
Since the deductee organization is not rectifying the previous year’s return. You can consider reaching out to the Income Tax Department directly and raising a grievance request about the same. Provide them with all the evidence and details you have, clearly explaining the discrepancy and the failure of the deductee organization to rectify the return.
Hi @Akshay_Shinde
You can read about Section 54F of Income Tax on sale of LTCA except house- Learn by Quicko which states that a taxpayer can claim an exemption on the sale of long-term capital asset except for house property if the taxpayer invests the sale consideration in the purchase or construction of a residential house property.
Hi @Akshay_Shinde
54F exemption is available if you invest the sales proceeds from the LTCA in the purchase or construction of a house property.
For more clarity about the taxation aspect, please refer to this article or you can Ask an Expert
Hi @Vinil_Vasani
The employee has a right to exercise the ESOP on the exercise date. However, if the employee does not exercise the same, there is no tax implication for the employee.
Hi @Vinil_Vasani
Yes, you will have to declare the ESOPs granted until they are vested in schedule FA while filing your ITR.
Hi @Priya_Bagade
In case of a refund of TDS of ESOPs, we need more information. On the basis of the available info, we cannot tell anything. You can Ask an Expert for the same.
Hi @Shrinivas_Shukla
ESOP allows an employee to buy a company’s stock below-market price. It also offers ownership interest to employees.
The exercise price is usually lower than the stock’s prevailing FMV. So, when the employee exercises the option, i.e., agrees to buy; the difference between the FMV (on exercise date) and exercise price is taxed as a prerequisite under Salary.
Budget 2020 amendment – From the FY 2020-21, an employee receiving ESOPs from an eligible start-up need not pay tax in the year of exercising the option.
Hey @Kiruba_v,
The period of holding is calculated from the exercise date up to the date of sale. Here’s a detailed read on ESOPs Taxation for you!
Hope this clarifies!