ESOP tax: why employees in India pay tax before they get any cash

In India, when an employee exercises stock options (ESOPs), the gap between the price paid and the share's fair value is taxed as a perquisite, like salary. For top-bracket earners this tax can reach about 39%. The tax is due at exercise, even if the employee cannot sell the shares yet.

A simple example

BW People gives this example. An employee exercises 10,000 options at Rs 100 each when the share is valued at Rs 1,000. The paper gain is Rs 90 lakh. The employee pays Rs 10 lakh to buy the shares and may owe about Rs 35 lakh in tax, without having sold anything.

• In unlisted companies, the Rs 1,000 value comes from a set formula, not a market price. Employees may wait years to sell.
• In listed companies, employees may have to sell a large part of their shares at once just to pay the tax.
• If shares later fall, the loss can be set off only against capital gains, not against salary.

What is being proposed

• Delay the tax until the employee can actually sell the shares. Eligible startups already get this deferral today.
• Tax the whole gain as capital gains when the shares are sold.
• Charge a lower rate on the exercise gain, with later growth taxed as normal capital gains.

The article notes that the UK, Singapore and the US already have gentler rules for some option schemes. It argues the change is mainly about timing, so the cost to the government should be small.

What this means for you

• If an offer includes ESOPs, ask when they vest, when you can exercise and when you could sell.
• Plan cash for the tax before you exercise.
• Employers and recruiters should explain ESOP tax timing clearly in offers.

This is general information, not tax advice. Speak to a tax expert about your own case.