How are ESOPs taxed in India?
ESOPs are taxed twice. At exercise, the difference between the fair market value (FMV) and the price you pay is taxed as a salary perquisite at your slab rate (and TDS is deducted). At sale, the gain over the FMV-at-exercise is taxed as capital gains. Employees of DPIIT-recognised eligible startups can defer the perquisite tax for up to five years.
1Tax at exercise
When you exercise the options, the perquisite = (FMV on exercise date − exercise price) × shares. It's added to your salary and taxed at your slab; the employer deducts TDS on it.
2Tax at sale
When you sell, capital gains = (sale price − FMV at exercise). Listed shares held over 12 months get 12.5% LTCG above ₹1.25 lakh; unlisted shares need 24 months for long-term treatment at 12.5%.
Frequently asked questions
Can startup employees defer ESOP tax?
Yes — employees of DPIIT-recognised eligible startups can defer the perquisite tax until the earliest of five years from exercise, sale of shares, or leaving the company.
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General information for AY 2026-27, not professional advice. Laws change with each Finance Act, notification or amendment and depend on your specific facts — verify the current position with a licensed CA or advocate before acting.