A Practical Guide to Declare ESOP Income Correctly in India

Employee Stock Option Plans (ESOPs) are no longer limited to startups. From listed companies to fast-growing unicorns, ESOPs have become a common part of employee compensation.
But when tax declaration season arrives, ESOPs often create confusion—What needs to be declared? When is it taxed? Does it impact TDS?

This guide explains ESOP taxation and tax declaration for salaried employees in simple terms, so you don’t overpay tax or invite compliance issues.

What Are ESOPs?

ESOPs give employees the right to buy company shares at a pre-decided price after completing a vesting period.

An ESOP lifecycle has three key stages:

1. Grant
2. Vesting
3. Exercise & Sale

👉 Taxation applies only at Exercise and Sale, not at grant or vesting.

How ESOPs Are Taxed in India

ESOP taxation happens in two separate stages, and both impact your overall tax planning.

Taxation at the Time of Exercise (Perquisite Tax)

When you exercise your ESOPs, the difference between:

• Fair Market Value (FMV) on exercise date
• Exercise price

is treated as perquisite income and taxed as salary.

Formula:

Perquisite Value = FMV – Exercise Price

📌 This amount:

• Is taxable under “Income from Salary”
• Is included in Form 16
• Is subject to TDS by employer

ESOP Declaration at Exercise Stage

✅ What Employees Must Declare:

• ESOP perquisite value
• Salary income including ESOP benefit

❌ What You Don’t Declare:

• Vesting value
• Notional gains

💡 If ESOPs are exercised during the financial year, your employer usually includes this automatically in tax declaration & payroll.

Taxation at the Time of Sale (Capital Gains Tax)

When you sell ESOP shares, capital gains tax applies.

Capital Gains Calculation:

Sale Price – FMV (on exercise date)

Holding Period	Tax Type
≤ 12 months	Short-Term Capital Gains (STCG)
> 12 months	Long-Term Capital Gains (LTCG)

📌 For listed shares:

• LTCG above ₹1 lakh taxed at 10%
• STCG taxed at 15%

Do You Declare ESOP Capital Gains in Tax Declaration?

❌ No

Capital gains from ESOPs:

• Are not declared to employer
• Are reported directly while filing ITR

👉 Employers handle salary TDS only, not capital gains tax.

ESOPs in Startups: Special Tax Relief

Eligible startups (as per DPIIT) offer deferred tax on ESOPs:

Perquisite tax is payable at the earliest of:

• Sale of shares
• Leaving the company
• 48 months from exercise

📌 Even with deferral, disclosure is important for long-term planning.

Documents Required for ESOP Tax Declaration

Keep these ready:

• ESOP grant letter
• Vesting schedule
• Exercise confirmation
• FMV certificate
• Payslips showing ESOP perquisite
• Form 16

These help during ITR filing and scrutiny.

Common Mistakes Employees Make 🚫

• Assuming ESOPs are taxed only on sale
• Not tracking FMV at exercise
• Ignoring ESOP income in Form 16
• Confusing perquisite tax with capital gains
• Not planning liquidity for ESOP tax outgo

How JM Financial Services Helps ESOP Holders

JM Financial Services supports employees and investors with:

• ESOP tax planning & advisory
• Capital gains computation
• Portfolio structuring after ESOP liquidation
• Long-term wealth management solutions

With ESOPs turning employees into shareholders, professional guidance becomes essential to optimise post-tax returns.

Key Takeaways

• ESOPs are taxed twice: at exercise and sale
• Perquisite tax impacts salary & TDS
• Capital gains are declared directly in ITR
• ESOP declaration errors can lead to higher tax or notices
• Advance planning reduces liquidity stress

Frequently Asked Questions (FAQs)

1. Are ESOPs taxable at vesting?

No. Tax applies only when you exercise the options.

2. Do I need to declare ESOPs every year?

Only in the year of exercise, not vesting.

3. Is ESOP income shown in Form 16?

Yes, perquisite value is included in salary.

4. Can employer deduct capital gains tax on ESOPs?

No. Capital gains are paid while filing ITR.

5. Is ESOP taxation different for startups?

Yes, eligible startups offer deferred tax relief.