ESOPs Taxation in the hands of an Employee

author portrait

Sakshi Shah

Capital Gains
ESOP
Form 16
Salary Income
Last updated on February 6th, 2023

What are ESOPs?

ESOP meaning Employee Stock Ownership Plan 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 form of direct stock, profit-sharing plans, or bonus. Below is a brief process for issue of ESOPs:

Before granting ESOPs to employees, an employer needs to follow rules and regulations relating to ESOPs as per the Companies Act 2013.

An employee needs to understand tax on ESOP before exercising the option. Below are the provisions for ESOP Taxation in the hands of an employee:

Hence it is important to understand the tax implications of Employee Stock Options before filing ITR for the financial year on the income tax website.

ESOP Terms Meaning
ESOP Full Form Employee Stock Ownership Plan
Grant Date Date of agreement between employer and employee to grant an option to the employee to own shares of the company
Vesting Date Date on which the employee is entitled to buy shares
Vesting Period Time period between grant date and vesting date
Exercise Period Time period when the employee has a right to buy the shares after the stocks are vested
Exercise Date Date on which the employee exercises the option
Exercise Price Price at which the employee exercises the option

Tax Implications of ESOPs

It is important to understand the ESOP taxation in India before the employer considers implementing an ESOP scheme.

ESOPs are taxed in the following two instances:

  1. At the time of exercising ESOP: It is considered as a Perquisite under the income head ‘Salary’. Hence, when an employee exercises his option, the difference between Fair Market Value (FMV) as on the date of exercise and the exercise price is taxable as a perquisite.
  2. At the time of selling ESOP: It is considered a Capital Gain. An employee might sell his/her shares after buying them. In case he/she sells these shares at a price higher than FMV on the exercise date, he/she would be liable for capital gains tax.

ESOPs Taxation on Purchase of Shares

When an employee exercises the stock option i.e. agrees to buy the shares, it is a taxable income. 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:

Example

Neha works in a startup in India. During FY 2021-22 her company announces ESOPs for all the current employees. Neha decides to exercise her option to buy the shares of the company. Under this scheme, Neha received 2000 shares at INR 20 per share. The FMV of the shares is INR 65 per share. Following are the tax implications on the above transaction.

Purchase Price: INR 20
FMV: INR 65
Perquisite: INR 45 (65-20)
Taxable Perquisite Amount: INR 90,000 (2000*65)

Now the company will treat INR 90,000 as a taxable salary and will deduct TDS on the same. While filing her ITR, Neha needs to report INR 90,000 as Perquisites under Salary Income Head.

Budget 2020 Amendment for ESOPs

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:

ESOPs Taxation on Sale of Shares

When an employee sells the shares, it is treated as Capital Gains. Here is the tax treatment for tax on sale of shares under ESOP:

Type of Share Period of Holding Capital Gain Tax Rate
Listed Shares Holding Period <= 12 months STCG u/s 111A 15%
Holding Period > 12 months LTCG u/s 112A 10% in excess of INR 1 lac
Unlisted Shares Holding Period <= 24 months STCG slab rates
Holding Period > 24 months LTCG u/s 112 20% with Indexation
Listed Shares must be listed on a recognised stock exchange in India. Thus, if you sell shares of a listed foreign company, they would be treated as unlisted shares if they are not listed on a recognised stock exchange in India
Tip
Listed Shares must be listed on a recognised stock exchange in India. Thus, if you sell shares of a listed foreign company, they would be treated as unlisted shares if they are not listed on a recognised stock exchange in India

Example

Arya is a salaried individual. She works for a company listed on NSE Ltd. She received 2000 shares from her company under the ESOPs scheme in FY 2020-21. And she sells the shares on 20/01/2022.

Date of Exercising the ESOPs i.e. Purchasing Shares: 25/02/2021
FMV as on 25/02/2021: INR 50
Sales Price as on 20/01/2022: INR 75

Below is the tax treatment and calculation of tax liability for Arya

Arya must pay tax on Capital Gains in FY 2021-22 on the sale of shares.

How to calculate FMV for ESOP?

Type of Share Meaning Trading Status FMV i.e. Fair Market Value
Listed Share Listed on a recognised stock exchange in India Traded on a recognised stock exchange as on exercise date Average of opening and closing price
Listed Share Listed on a recognised stock exchange in India Not traded on a recognised stock exchange as on exercise date Closing price on the date preceding the exercise date
Unlisted Share Not listed on a recognised stock exchange in India   Price determined by a merchant banker
Find the best plan
Find the best plan
GET EXPERT HELP
Find the best plan
Find the best plan

Treatment of Loss from Sale of ESOPs

The loss on sale of shares received in form of ESOPs is a Capital Loss.

FAQs

Under which head of Income-tax is ESOP taxable and which ITR is to be filed?

-When an employee buys the shares of a company, it is treated as a Perquisite. And thus taxable under the head Salary. In this case, the taxpayer is required to file ITR-1.
-When an employee sells the shares, it is treated as Capital Gains and thus taxable under the Capital Gain head. In this case, the taxpayer is required to file ITR-2.

How do I report ESOPs i.e. employee stock options in my Income Tax Return?

The taxpayer must report perquisite under salary income on exercising the ESOP. Further, he/she 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.

Am I liable to pay Income Tax if I do not exercise the ESOP?

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.

Got Questions? Ask Away!

  1. 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

  2. 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.

  3. 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

  4. 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.

  5. Hi @Vinil_Vasani

    Yes, you will have to declare the ESOPs granted until they are vested in schedule FA while filing your ITR.

  6. 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.

  7. 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.

  8. 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!

Continue the conversation on TaxQ&A

8 more replies

Participants

Avatar for Shrutika_Shah Avatar for Surbhi_Pal Avatar for Akshay_Shinde Avatar for Kiruba_v Avatar for Muskan_Balar Avatar for Jammu_Kashmir_Unity Avatar for Priya_Bagade Avatar for Ridhima_Sharma Avatar for Shrinivas_Shukla Avatar for Vinil_Vasani Avatar for riya_gupta