Employee Stock Option (ESOP) Taxation

An Employee Stock Option (ESOP) is a benefit given by companies to their employees, giving them the option to buy company shares at a predetermined price (exercise price) after a certain period (vesting period).

The tax implications occur at two points:

1. When the option is exercised (employee buys shares)

2. When the shares are sold (capital gains arise)

2. Tax at Exercise (Perquisite Tax)

• When an employee exercises the ESOP, the difference between the Fair Market Value (FMV) on the exercise date and the exercise price is treated as a perquisite under salary income.

• This is taxable in the financial year of exercise at the employee’s income tax slab rate.

Formula:

$$\text{Perquisite Value}=(\text{FMV at Exercise}-\text{Exercise Price})\times \text{Number of Shares}$$

Example:

This ₹5 lakh is added to salary income and taxed according to the employee’s slab.

Note: Tax may also be deducted at source (TDS) by the employer.