Free tool: ESOP tax calculator (India) — Perquisite tax at exercise and capital gains on sale under the 2026 rules.
Tax event 1: at exercise
- The difference between the fair market value on the exercise date and the exercise price is taxed as salary (a perquisite).
- The employer deducts TDS through payroll.
Tax event 2: at sale
- Capital gain = sale price minus the FMV that was taxed at exercise.
- Unlisted shares held more than 24 months give long-term gains taxed at 12.5% without indexation; shorter holdings are taxed at slab rates.
The startup deferral
- Employees of an eligible startup — one with DPIIT recognition and an Inter-Ministerial Board certificate (see DPIIT recognition) — can defer the tax at exercise.
- The tax becomes payable within 14 days of the earliest of: 60 months from the end of the tax year of allotment, selling the shares, or leaving the company. It’s calculated at the rates for the year of allotment.
- This carried over into the Income-tax Act, 2025 — the wording changed, not the substance.
Valuation
For unlisted shares, FMV must be determined by a SEBI-registered Category I merchant banker, on a valuation date no more than 180 days before the exercise date. Plan exercise windows around one valuation.
Options from a foreign parent
If your options are in a US parent, the same Indian tax applies at exercise, plus FEMA reporting — see US parent ESOPs and 409A vs Indian valuation.
Frequently asked questions
How are ESOPs taxed in India?
At exercise, the difference between fair market value and exercise price is taxed as salary with TDS by the employer. At sale, the gain over that fair market value is taxed as capital gains — 12.5% for unlisted shares held more than 24 months.
Can startup employees defer ESOP tax?
Yes, employees of eligible startups with DPIIT recognition and an Inter-Ministerial Board certificate can defer tax at exercise until the earliest of 60 months from the end of the tax year of allotment, sale of the shares, or leaving the company.
Who determines FMV of unlisted shares for ESOP tax?
A SEBI-registered Category I merchant banker, on a valuation date no more than 180 days before the exercise date.
Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.