ESOP and RSU Tax in India: Perquisite and Capital Gains

ESOPs and RSUs are taxed twice in India: first as a salary perquisite when you exercise the option or your RSUs vest, and again as capital gains when you finally sell the shares. The perquisite is the gap between the share's fair market value and what you paid, taxed at your slab rate, with the employer deducting TDS. This guide covers both events for FY 2025-26 (assessment year 2026-27) under the Income-tax Act, 1961.

This applies to any salaried person in India who receives equity from their employer: Employee Stock Option Plans (ESOPs), where you pay a fixed exercise price to buy shares, or Restricted Stock Units (RSUs), where shares are granted free and simply vest over time. It covers shares of Indian listed companies, Indian unlisted startups, and foreign-listed parents (for example, a software engineer in Hyderabad granted RSUs by a US-listed employer). The mechanics are the same; only the rates and disclosure rules differ by where the share is listed.

Stage 1 - perquisite on exercise or vesting (taxed as salary). Under Section 17(2)(vi) of the Income-tax Act, 1961, the difference between the fair market value (FMV) of the share on the date you exercise an ESOP (or the date an RSU vests) and the price you actually paid is treated as a perquisite under the head “Salary”. For RSUs the exercise price is usually nil, so the entire FMV on the vesting date is the perquisite. This amount is added to your salary income and taxed at your applicable slab rate, and your employer deducts TDS on it under Section 192.

Stage 2 - capital gains on sale. When you later sell the shares, you pay capital gains tax on the profit. The cost of acquisition is the FMV that was already taxed as a perquisite in Stage 1 (not the exercise price you paid). So your capital gain is: sale price minus FMV on the date of exercise or vesting. This avoids being taxed twice on the same value.

1. Listed Indian shares: FMV is the average of the opening and closing price on the recognised stock exchange on the exercise or vesting date (Rule 3(9) of the Income-tax Rules).
2. Unlisted Indian shares (startups): FMV must be certified by a SEBI-registered Category I merchant banker, and the valuation cannot be older than 180 days from the exercise date.
3. Foreign-listed shares (US tech etc.): FMV is taken from the foreign exchange price on the vesting date, converted to rupees. For RSUs many employers sell a portion of vested shares to fund the TDS (“sell-to-cover”).

The holding period for Stage 2 starts from the date of exercise or vesting, not the grant date. Rates below reflect the law after 23 July 2024 (Finance (No.2) Act 2024).

Foreign-listed RSUs (US-listed parents and similar) are treated as unlisted shares for Indian tax, because they are not listed on a recognised Indian stock exchange. So the long-term holding period is 24 months and the LTCG rate is 12.5% without indexation, with no Section 112A Rs 1.25 lakh exemption.

To stop employees of cash-poor startups from paying tax on illiquid shares they cannot yet sell, Section 192(1C) lets an eligible startup defer the Stage 1 perquisite TDS. The tax is not waived, only postponed. It becomes payable on the earliest of these three dates:

1. 48 months (about five years) from the end of the assessment year in which the shares were allotted;
2. the date you sell or transfer the shares; or
3. the date you cease to be an employee of that company.

The catch is who qualifies. The deferral is available only if the employer is an “eligible startup” under Section 80-IAC, which means it must hold a valid Inter-Ministerial Board (IMB) certificate, not just DPIIT recognition. Very few of the lakhs of DPIIT-recognised startups hold this IMB certificate, so for most employees the deferral does not apply and the perquisite TDS is deducted at exercise as usual.

1. At exercise or vesting, check your payslip and Form 16: the perquisite value should already appear under salary and TDS should have been deducted.
2. Confirm the FMV your employer used (exchange average for listed, merchant-banker certificate for unlisted, foreign price converted to rupees for overseas shares). Keep this figure - it is your cost of acquisition for Stage 2.
3. If you hold foreign shares (such as US RSUs), file ITR-2 or ITR-3, not ITR-1. ITR-1 cannot report foreign assets.
4. Disclose foreign shares in Schedule FA (Foreign Assets) of the ITR even if you have not sold them. Schedule FA is reported for the calendar year (1 January to 31 December), not the financial year.
5. On sale, compute capital gain as sale price minus the FMV from Stage 1, and apply the correct rate from the table above based on your holding period.
6. For foreign shares, also check for dividend tax credit under the India-US DTAA (claimed via Form 67) if the US withheld tax on dividends.

1. Using the exercise price instead of the Stage-1 FMV as the cost of acquisition on sale, which inflates your capital gain and your tax.
2. Counting the holding period from the grant date instead of the exercise/vesting date.
3. Assuming foreign RSUs get the Section 112A Rs 1.25 lakh exemption - they do not, because they are unlisted for Indian tax.
4. Skipping Schedule FA. Non-disclosure of foreign assets carries heavy penalties under the Black Money Act, so report vested foreign shares even before you sell.
5. Assuming every DPIIT-recognised startup can defer your TDS - only those with the Section 80-IAC IMB certificate can.

For a wider walkthrough of how to question a wrong tax figure or settlement, see the guide on wrong capital gains in your AIS. To understand how citizens use information rights with public bodies, read The RTI Playbook.

Yes, but not on the same money. Stage 1 taxes the benefit you receive as salary (FMV minus what you paid) at slab rate when you exercise or vest. Stage 2 taxes only the further profit when you sell (sale price minus that FMV) as capital gains. The FMV already taxed in Stage 1 becomes your cost in Stage 2, so there is no double tax on the same value.

On vesting, the rupee value of the vested shares is a salary perquisite taxed at your slab rate. On sale, the gain is computed from the vesting-date FMV. Because the shares are not listed in India, the long-term holding period is 24 months and the LTCG rate is 12.5% without indexation. You must file ITR-2 or ITR-3 and disclose the shares in Schedule FA.

Only if your employer is an eligible startup under Section 80-IAC with a valid Inter-Ministerial Board (IMB) certificate. If it qualifies, the perquisite tax is deferred to the earliest of: 48 months from the end of the assessment year of allotment, the date you sell the shares, or the date you leave the company. DPIIT recognition alone is not enough.

For listed Indian equity, more than 12 months. For unlisted Indian shares and for foreign-listed shares (including US RSUs), more than 24 months. The clock starts on the date of exercise or vesting, not the date the option was granted.

Yes. A resident and ordinarily resident taxpayer must disclose all foreign assets held at any time during the calendar year in Schedule FA of the ITR, including vested but unsold foreign shares. Non-disclosure attracts steep penalties, so report them even with no sale.

If held 12 months or less, short-term capital gains are taxed at 20% under Section 111A. If held more than 12 months, long-term gains are taxed at 12.5% under Section 112A on the amount above Rs 1.25 lakh in the year. The gain is measured from the FMV taxed at exercise.

Keep three numbers safe for every tranche: the FMV taxed at Stage 1, the exercise/vesting date, and what you actually paid. With those, your Stage 2 capital gain is straightforward. If you hold foreign shares, file ITR-2 or ITR-3, fill Schedule FA, and check the DTAA credit for any tax the foreign country withheld. If you are a startup employee, ask your HR or finance team in writing whether the company holds a Section 80-IAC IMB certificate, because that single fact decides whether your perquisite TDS can be deferred. When the figures are large or your residential status changed during the year, a quick review by a chartered accountant before filing is worth it.