How ESOPs and RSUs are taxed in India: Latest capital gains tax rates and startup ESOP tax rules
ESOPs (Employee Stock Option Plans) and RSUs (Restricted Stock Units) are popular components of employee compensation, especially in startups, listed companies, and MNCs. However, their taxation often confuses employees because tax is triggered at two different stages.
Under Indian tax law, ESOPs and RSUs follow a clear two-stage taxation framework:
Perquisite tax as salary when shares are acquired (exercise/vesting)
Capital gains tax when those shares are eventually sold.
Let’s break this down.
Stage 1: Perquisite Tax
At the time of exercise of your ESOPs or RSUs , the difference between the fair market value (FMV) on that date and what you pay is treated as a taxable perquisite under the head income from salary.
For ESOPs and RSUs: Perquisite = (FMV on exercise date – exercise price) × number of shares.
In case both RSUs and ESOPs, if the employee doesn’t pay anything or pays a nominal amount to acquire them, the exercise price is either considered nil or the nominal amount.
Your employer is required to:
The company first calculates the fair value of the shares: For listed shares, this is based on the market price of the day on which the employee exercises the option to buy. For unlisted shares, an independent valuer determines the value.
This value is then treated like part of your salary, tax is deducted by the employer, and the details appear in your salary tax documents (Form 16 / Form 12BA).
This tax is payable even if you do not sell the shares immediately after exercise the options. You are taxed simply for receiving them as part of your compensation.
Stage 2: Capital Gains Tax
Once shares are allotted in lieu of the options, they become a capital asset. When you eventually sell these shares, the difference between sale price and the cost of acquisition is taxed as capital gains.
Cost of acquisition = FMV (derived at the perquisite taxation stage).
Capital gain = Sale price – FMV (on exercise of options).
The holding period and whether the shares are listed or unlisted determine if the gain is treated as:
Short‑term capital gains (STCG):
Listed shares: Sold within 12 months of allotment.
Unlisted shares: Sold within 24 months of allotment.
Long‑term capital gains (LTCG):
Listed shares: Held for more than 12 months.
Unlisted shares: Held for more than 24 months.
Rate table for FY 2025‑26 (post‑July 23,2024 transfers)
Type of share | Nature of gain | Holding period rule | Tax rate (FY 2025‑26) | Key notes |
|---|---|---|---|---|
Listed equity shares (STT paid) | STCG | Sold within 12 months | 20% | Section 111A, rate increased from 15% to 20% post‑July 23, 2024. |
Listed equity shares (STT paid) | LTCG | Held > 12 months | 12.5% on gains exceeding ₹1.25 lakh | Section 112A, uniform 12.5% LTCG, higher exemption limit ₹1.25 lakh. |
Unlisted shares | STCG | Sold within 24 months | Taxed at slab rates | No special concessional STCG rate. |
Unlisted shares | LTCG | Held > 24 months | 12.5% | Section 112, indexation benefit removed for shares. |
Updated Capital Gains Tax Rates for FY 2025‑26
Finance (No.2) Act 2024 and subsequent amendments have made 12.5% the central LTCG rate, with specific rules for listed equities and other assets.
1) Listed ESOP/RSU Shares with Securities Transaction Tax (STT)
If your ESOP/RSU shares are in an Indian listed company and STT is paid:
Holding ≤ 12 months (short‑term):
If you sell listed ESOP/RSU shares within 12 months, the profit is treated as short-term capital gain (STCG) and taxed at 20% under Section 111A, plus applicable surcharge and cess.
In most cases, STCG is taxed at a fixed concessional rate for listed equity sold with STT paid (as per the applicable equity STCG rules).
If your transaction doesn’t qualify for that concessional rule, then it may be taxed as per your normal income tax slab rate.
Holding > 12 months (long‑term):
LTCG on listed equity, equity‑oriented funds and business‑trust units is taxed at 12.5% on gains above ₹1.25 lakh in a year, plus surcharge and cess.
2) Unlisted ESOP/RSU Shares (Private Companies, Startups, MNC Subsidiaries)
If the company is unlisted, equity‑share holding period for LTCG is typically more than 24 months, and STT usually does not apply.
For ESOP/RSU shares, long-term capital gains (LTCG) are typically taxed at 12.5% under the current rules.
The older ‘20% with indexation’ option is now mainly limited to certain land/building cases (in specific situations) and generally does not apply to unlisted shares.
So, for most ESOP/RSU holders especially in unlisted companies LTCG is effectively 12.5% without indexation (i.e., without inflation adjustment on cost).
Special Rules for Startup ESOPs (Deferred Tax Model)
As startup ESOPs are often hard to sell immediately (due to low liquidity), the law allows employees of eligible startups to delay paying the tax on perquisite that arises when they exercise ESOPs.
This is a tax deferral, not a tax waiver, as you still must pay the tax. It’s however based on certain events. It can be after selling the shares, leaving the company, or after a fixed period.
For eligible startups and eligible employees:
Even though your ESOP perquisite tax is calculated when you exercise the options, you don’t have to pay it immediately (and the company doesn’t deduct TDS immediately). The tax gets delayed and becomes payable on whichever happens first:
Four years after the end of that tax year (financial year) in which the ESOP shares were allotted or
When you sell the ESOP shares, or
When you leave the startup:
If you exercised ESOPs before leaving:
If you exercised your ESOPs while you were still on the payroll, the perquisite is already crystallised, but for eligible startups the TDS and payment are deferred. The startup must deduct TDS within 14 days of the earliest of:
four years after the end of the Tax Year of allotment,
the date you sell the shares, or
the date you leave the company, even though you are no longer an employee at that time.
If you did not exercise ESOPs before leaving:
If you leave without exercising your vested options, there is no ESOP perquisite yet, so Section 192(1C) does not apply, and the company has no TDS obligation. If you exercise the options after leaving the company, the perquisite tax still arises. In practice ex‑employees usually pay the tax due themselves via advance or self‑assessment tax.
.
Eligibility is narrow:
The company must qualify as an ‘eligible startup’ under Section 80‑IAC. This broadly means it is DPIIT‑recognised, incorporated on or after 1 April 2016, has turnover not exceeding ₹100 crore in any year, and holds the prescribed Inter‑Ministerial Board certificate.
Relief applies only to ESOPs of such startups. Big, listed tech or MNC ESOPs do not get this deferral.
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FAQ
Yes. When you exercise ESOPs (or when RSUs vest), the difference between FMV and what you pay is taxed as a salary perquisite, even if you keep holding the shares and do not sell them immediately. Only ‘eligible startup’ employees get a deferral of this payment to a later trigger date, others pay in the year of exercise/vesting via TDS and self‑assessment.