ESOP for Employees

Can any one tell me about ESOP and Tax calculation for ESOP.


Hi @Nigil

We have discussion about this here:Employee stock options

Inside our community. Please go through that and let us know if you need any further information.


(ESOP) means employee benefit which gives the employees an ownership stake in the company.
The employer gives a certain percentage of the company’s stock shares to each eligible employee
at no upfront cost.

Tax Treatment .

1.Employees are only taxed when they receive a distribution from the ESOP after retirement
or when they leave the company.

2.If any gains generated from it can be tax under Capital Gains.


Tax on ESOPs is calculated at two stages-

  1. First level occurs when shares are allotted to the employee after he has exercised his option on completion of the vesting period and
  2. Second level occurs when the employee opts to sell the allotted shares under the ESOP.

EX: On July 1, 2014 Mr. X an employee of ABC Pvt Ltd has been given an option under ESOP , to purchase 10,000 shares of ABC Ltd. As per the policy, the option can be exercised at the end of 3 years i.e. July 1, 2017 at an exercise price of INR. 60.

On July 1, 2017, Mr. X exercised the his option. The fair market price of the shares of ABC Ltd at that time was INR 100. Further, on January 31, 2018, he decides to sell the shares @ 120 each.

Now, we will see how the ESOP Taxation will work:

First level of taxation (when the option is exercised):

ESOPs would be taxed as perquisite, the value of which would be (on date of allotment) = (FMV per share – Exercise price per share) x number of shares allotted.

(100-60) x 10,000 = 400,000

The amount calculated above as perquisite value of ESOP i.e. Rs. 4,00,000 shall form part of X’s salary and be taxable in the year of allotment of such shares. Employer is liable to deduct TDS on such amount.

Second level of taxation (when ESOPs are sold):

When Mr X decides to sell the share on January 01, 2018, he would be liable to pay capital gain tax , which shall be calculated as follows:

Capital gains = Sale proceeds – FMV of shares at the time of allotment of shares

(120 – 100) x 10,000 = Rs. 200,000

Since the holding period of shares in the hands of X is less than 12 months (will be counted from the date of allotment), gains will be classified as Short-term Capital Gains and will be taxable as per the normal slab rates applicable on X.


Thank You Chetan Ji for detail clarification

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