Taxation of Employee Stock Option Plans

• February 9, 2024
• CA Chandan Agarwal's Office

At the time of sale of ESOPs by the employee, the same would be subjected to capital gains tax depending on the nature of ESOP.

a) Taxation at the time of issue

At the time of exercise (i.e. when ESOPs are allotted by the company), ESOPs are taxable as perquisites u/s 17(2) of the Income-tax Act (“IT Act”) in the hands of the employees. The taxable amount of such perquisite would be the Fair market value (FMV) of the shares (computed in accordance with Rule 3(8) of the IT Act) on the date of exercising such option less the exercise price or amount paid by the employee for such ESOPs.

b) Taxation at the time of Sale

At the time of sale of ESOPs by the employee, the same would be subjected to capital gains tax depending on the nature of ESOP i.e. listed or unlisted as well as the period of holding for such share which shall be computed from the date of allotment of ESOPs till the date of sale of shares by the employee.

In case of listed shares, long term capital gains arising from shares held for more than one year and exceeding Rs. 1 lakh would be subjected to tax @ 10% (without indexation) u/s 112A of the IT Act whereas short term capital gains would be subjected to tax @ 15% u/s 111A of the IT Act.

In case of unlisted shares, the long term capital gains held for more than 24 months would be subjected to tax @ 20% (after indexation) u/s 112 of the IT Act whereas short term capital gains would be taxed as per the marginal slab rates applicable to the employee.

Source: https://www.financialexpress.com/money/income-tax-taxation-of-employee-stock-option-plans-3386982/