# ESOP Taxation in India: Exercise, Sale and Deferral > How ESOPs are taxed in India in FY 2026-27: perquisite tax at exercise, capital gains at sale, listed vs unlisted shares and the start-up deferral. Source: https://trykosh.com/learn/esop-taxation-india Guide - Equity compensation # ESOP taxation in India: what you pay at exercise and at sale ESOPs are taxed twice: once as salary when you exercise, and again as capital gains when you sell. The first bill often arrives years before any cash does. Here's how both work, what changes if the company is listed or a start-up, and how to plan the cash. Updated 30 October 20267 min readBy the Kosh team On this page[The four dates that matter](#four-dates)[Tax at exercise: a perquisite, taxed as salary](#exercise)[Worked example: a start-up employee](#worked-example)[Tax at sale: listed vs unlisted](#sale)[The start-up deferral](#deferral)[Planning the exercise](#planning)[Filing and paperwork](#filing)[FAQs](#faq) ## The four dates that matter An option goes through four stages, and only two of them create tax for you. When ESOPs are taxed, for a resident employee Stage What happens Tax Grant The company promises you options at a fixed exercise price None Vesting You earn the right to exercise, usually over four years with a one-year cliff None Exercise and allotment You pay the exercise price and the shares are allotted to you Perquisite tax as salary, on fair market value minus exercise price Sale You sell, in a buyback, a secondary sale or on the stock exchange Capital gains tax, on sale price minus that fair market value ## Tax at exercise: a perquisite, taxed as salary When shares are allotted to you, the difference between their **fair market value (FMV) on the exercise date** and the price you paid is a perquisite. It is added to your salary for that year and taxed at your slab rate, plus surcharge and 4% cess, in **both regimes**. Your employer deducts TDS on it through payroll and shows it in Form 16, even though you received shares and not cash. - **Listed in India:** FMV is the average of the opening and closing price on the exercise date on the recognised stock exchange (the one with the higher volume if it trades on more than one). - **Unlisted (most start-ups):** FMV is set by a valuation from a SEBI-registered Category I merchant banker, as of the exercise date or a date up to 180 days before it. Ask HR for the figure before you exercise. - **Shares of a foreign parent:** the same two-stage treatment applies, with the value converted to rupees. See the [RSU taxation guide](/learn/rsu-taxation-india) for the foreign-asset reporting that comes with them. ## Worked example: a start-up employee Neha earns a INR 30 lakh salary at an unlisted start-up and stays in the new regime. Her salary tax is **INR 4,75,800**. She exercises 2,000 vested options at INR 10 each when the merchant banker's FMV is INR 410. 1. **Perquisite:** (INR 410 − INR 10) x 2,000 = **INR 8,00,000**, added to her salary. Her total tax for the year rises to INR 7,25,400, so the exercise costs **INR 2,49,600** in tax, all at 30% plus cess. She has paid INR 20,000 to exercise and received no cash. 2. **Three years later** the company runs a secondary sale at INR 1,000 a share. Her cost for capital gains is the INR 410 FMV, not the INR 10 she paid, so the gain is INR 590 x 2,000 = **INR 11,80,000**. 3. Unlisted shares held for more than 24 months are long-term: 12.5% without indexation and with no INR 1.25 lakh exemption (that exemption is only for listed equity). Tax: **INR 1,53,400** including cess, if her total income that year stays under INR 50 lakh. 4. **Net result:** INR 20 lakh of sale proceeds, minus INR 20,000 exercise cost and INR 4,03,000 of tax, leaves about **INR 15,77,000**. Scale it up and the cash problem is obvious. Exercising 10,000 of the same options creates a INR 40 lakh perquisite, which on top of her salary adds **INR 14,20,380** of tax, because the extra income also pushes her past the INR 50 lakh surcharge line. That is due through payroll in the year of exercise, whether or not the shares can be sold. The [ESOP tax calculator](/tools/esop-tax-calculator) runs both stages for your numbers. ## Tax at sale: listed vs unlisted Capital gains on ESOP shares, resident, FY 2026-27 (plus surcharge where applicable and 4% cess) Shares Long-term after Short-term Long-term Listed on an Indian exchange, sold on the exchange 12 months 20% 12.5% above INR 1.25 lakh a year (shared with all your listed equity gains) Unlisted Indian company 24 months Your slab rate 12.5%, no indexation, no INR 1.25 lakh exemption Shares of a foreign company 24 months Your slab rate 12.5%, no indexation, no INR 1.25 lakh exemption The holding period runs from the date the shares were **allotted**, not from grant or vesting. Your cost is the FMV that was taxed as a perquisite, so you are never taxed twice on the same rupee. If an unlisted company later lists in India, sales on the exchange generally follow the listed-share rules. Surcharge on these capital gains is capped at 15%, unlike salary, where it can reach 25% in the new regime. **Buybacks are their own case** How a start-up liquidity event is taxed depends on how it is structured. A secondary sale to an investor is a capital gain. Buyback taxation has changed twice recently: from October 2024 buyback proceeds were taxed as dividend, and Budget 2026 moved shareholders back towards capital-gains treatment. Ask the company how the event is structured and check the rules in force on that date before you tender. ## The start-up deferral Employees of **eligible start-ups**, those certified for the start-up tax holiday long known as section 80-IAC, don't have to pay the perquisite tax in the year of exercise. The tax is still calculated in that year, but it is payable within 14 days of the **earliest** of: - 48 months from the end of the tax year in which the shares were allotted, - the date you sell the shares, or - the date you leave the company. Most start-ups don't hold this certificate, so DPIIT recognition alone isn't enough; ask HR whether the deferral applies before you exercise. It postpones the bill but doesn't shrink it, and leaving the company brings it forward. If you plan to switch jobs, budget for the deferred tax as if it were due on your last day. ## Planning the exercise - **Exercise in a lower-income year.** The perquisite is taxed at your marginal rate in the year of exercise. A year with a sabbatical, a gap between jobs or no bonus can mean a lower slab or no surcharge. - **Watch the surcharge lines.** Total income above INR 50 lakh, INR 1 crore and INR 2 crore attracts surcharge of 10%, 15% and 25% on the whole tax. Splitting a large exercise across two tax years can keep each year under a line. The [surcharge calculator](/tools/surcharge-calculator) shows the effect. - **Check the post-exit window.** Many plans give you a limited period after leaving to exercise vested options, or they lapse. Exercising then means paying tax on paper value; a longer window is worth negotiating. - **Listed companies:** a cashless exercise or sell-to-cover sells enough shares at once to pay the exercise price and tax, so no cash is needed up front. - **Don't let one company become your net worth.** Your salary already depends on it. Many planners keep any single stock under about 10% of net worth; see [wealth planning for high earners](/learn/wealth-planning-for-high-earners-india). ## Filing and paperwork - The perquisite appears in Form 16 (Part B and the perquisite statement) and is covered by your employer's TDS. - Capital gains on sale are not covered by TDS for residents. Pay advance tax in the instalment after the sale; see the [advance tax guide](/learn/advance-tax-guide). - Capital gains beyond small listed-equity gains mean ITR-2 rather than ITR-1, and ITR-2 asks for details of any unlisted shares you held during the year. Shares of a foreign company also go in Schedule FA. - Keep the exercise letter, the merchant banker's valuation, allotment confirmation and the sale contract. They prove your cost and holding period years later. [Free tool**ESOP tax calculator**ESOPs are taxed twice: once when you exercise, as salary, and again when you sell, as capital gains. See both.](/tools/esop-tax-calculator)[Free tool**Surcharge calculator**For incomes above INR 50 lakh: see your surcharge band, how much marginal relief saves you at the threshold, and your total tax with cess.](/tools/surcharge-calculator)[Free tool**Capital gains tax calculator**Pick the asset, enter the purchase and sale dates and prices, and Kosh tells you whether the gain is short-term or long-term and works out the tax under the FY 2026-27 rules.](/tools/capital-gains-tax-calculator)[Free tool**Advance tax calculator**Split this year's tax into the four advance-tax instalments, net of TDS, so you pay on time and avoid interest.](/tools/advance-tax-calculator) **Where Kosh fits** Kosh reads your payslips and statements, shows what an exercise would do to this year's tax and surcharge, and reminds you before advance-tax dates after a sale. It doesn't value your company or tell you whether to exercise. ## Frequently asked questions When are ESOPs taxed in India? Twice. At exercise, the fair market value minus the exercise price is a perquisite taxed as salary at your slab rate. At sale, the sale price minus that fair market value is a capital gain. Grant and vesting are not taxed. How is the fair market value of unlisted ESOP shares decided? By a valuation from a SEBI-registered Category I merchant banker, as of the exercise date or a date up to 180 days before it. For shares listed in India, it is the average of the opening and closing price on the exercise date. Can start-up employees defer ESOP tax? Yes, if the start-up is eligible for the start-up tax holiday under what was section 80-IAC. The perquisite tax is then payable within 14 days of the earliest of 48 months from the end of the tax year of allotment, the sale of the shares, or leaving the company. What is the capital gains tax on unlisted ESOP shares? If held for more than 24 months from allotment, 12.5% without indexation and without the INR 1.25 lakh exemption, plus cess and any surcharge. If held for 24 months or less, the gain is added to your income and taxed at your slab rate. Does the new tax regime change ESOP taxation? No. The perquisite at exercise and the capital gain at sale are taxed the same way in both regimes. The regime only changes the slab rates applied to the perquisite and the deductions available against your other income. Do I pay tax on ESOPs if I never sell? Yes, on the perquisite at exercise, unless you work for an eligible start-up that allows deferral. Capital gains tax arises only when you sell or otherwise transfer the shares. ## Sources - [Income Tax Department](https://www.incometax.gov.in/) - [Startup India (DPIIT)](https://www.startupindia.gov.in/) - [SEBI investor education](https://investor.sebi.gov.in/) Written by the Kosh team and checked against the rules in force on 30 October 2026. This guide is general information, not tax, legal or investment advice. Kosh is an educational financial planning tool by Primedepth Labs. It is not a SEBI-registered investment adviser and does not offer personalised investment advice, hold your money or execute trades. Markets carry risk; read scheme documents carefully and consult a registered adviser before acting. ## Upload your statement and Kosh does this for you. Kosh reads your bank and card statements, works out your tax under both regimes and turns guides like this one into your own numbers and next steps. [Start free](/signup?via=learn-esop-taxation-india)