Stox N Tax

Understanding Taxation on Employee Stock Options (ESOPs) and RSUs in India

Introduction

Employee Stock Options (ESOPs) and Restricted Stock Units (RSUs) are popular compensation tools used by companies to reward and retain employees. However, many salaried professionals are unaware of how ESOPs and RSUs are taxed in India, which can lead to unexpected tax liabilities.

In this guide, we’ll cover:
 How ESOPs and RSUs work
 Tax implications at different stages (vesting, exercise, and sale)
 How to minimize tax liability on ESOPs & RSUs
 Important compliance requirements

1. What Are ESOPs and RSUs?

A. Employee Stock Options (ESOPs)

ESOPs give employees the right (but not obligation) to buy company shares at a pre-determined price (exercise price) after a certain period (vesting period).

Key Features:
 Employees need to exercise the option by paying the exercise price.
 There is a vesting period before options can be exercised.
 After exercise, the shares can be held or sold in the stock market.

Example:

  • Your company grants you 1,000 ESOPs at an exercise price of ₹100 per share.
  • After 4 years of vesting, you decide to exercise the options when the market price is ₹500 per share.

B. Restricted Stock Units (RSUs)

RSUs are company shares granted to employees that automatically vest after a certain period. Unlike ESOPs, employees do not need to pay any exercise price to receive RSUs.

Key Features:
 No need to pay to exercise – shares are directly allotted.
 RSUs automatically convert into company shares once vested.
 After vesting, employees can sell the shares or hold them for future gains.

Example:

  • Your company grants you 500 RSUs that will vest after 3 years.
  • On vesting, the market price of each share is ₹800.
  • The shares are directly credited to your demat account.

2. How Are ESOPs and RSUs Taxed in India?

The taxation of ESOPs and RSUs occurs at two stages:
 At the time of Exercise/Vesting (as perquisite tax)
 At the time of Sale (as capital gains tax)

A. Tax on ESOPs at the Time of Exercise

When an employee exercises ESOPs, the difference between the Fair Market Value (FMV) of the shares and the exercise price is taxed as perquisite income under “Salary Income”.

Formula:
Taxable Perquisite = (FMV on exercise date – Exercise Price) × No. of shares

 TDS is deducted by the employer as per the applicable income tax slab.
 Startups registered with DPIIT get a tax deferral benefit for 5 years or until the employee leaves the company.

 Example Calculation:

  • Exercise Price = ₹100 per share
  • Market Price (FMV) on Exercise Date = ₹500 per share
  • No. of ESOPs exercised = 1,000

Taxable Perquisite = (₹500 – ₹100) × 1,000 = ₹4,00,000

 Applicable Tax:

  • If the employee falls in the 30% tax slab, the tax liability would be ₹1,20,000 (30% of ₹4,00,000).
  • The employer will deduct TDS before crediting the shares.

B. Tax on RSUs at the Time of Vesting

When RSUs vest, the FMV on the vesting date is taxed as perquisite income under salary.

 TDS is deducted by the employer based on the employee’s income tax slab.
 Employees receive shares after TDS deduction.

 Example Calculation:

  • 500 RSUs vested at ₹800 per share.
  • Taxable Perquisite = ₹4,00,000 (500 × ₹800).
  • Tax at 30% slab = ₹1,20,000 deducted by the employer.

C. Tax on Sale of ESOPs/RSUs (Capital Gains Tax)

Once an employee sells the shares acquired through ESOPs or RSUs, capital gains tax is applicable.

Holding PeriodTax TypeApplicable Tax Rate
Less than 12 monthsShort-Term Capital Gains (STCG)15%
More than 12 monthsLong-Term Capital Gains (LTCG)10% (on gains exceeding ₹1 lakh)

 Example:

  • If you sell 1,000 ESOP shares at ₹600 per share (after holding for 2 years), the LTCG is calculated as:
    • Selling Price = ₹600 per share
    • FMV on Exercise Date = ₹500 per share
    • Capital Gain = (₹600 – ₹500) × 1,000 = ₹1,00,000

 Since the LTCG exemption limit is ₹1,00,000, no tax will be payable!

3. How to Reduce Tax on ESOPs & RSUs?

 Hold shares for more than 1 year to qualify for lower 10% LTCG tax.
 Plan your exercise timing to avoid being pushed into a higher tax slab.
 For startup employees, check if DPIIT tax deferral is applicable.
 Use capital loss adjustments to reduce overall tax burden.

4. Compliance & Reporting Requirements

 Declare ESOPs/RSUs in ITR under Salary & Capital Gains section.
 Report foreign stock holdings in Schedule FA (if RSUs/ESOPs are from foreign companies like Google, Amazon, etc.).
 Use Form 67 for Foreign Tax Credit (FTC) claims if tax is paid overseas.

Conclusion

ESOPs and RSUs are valuable compensation tools but come with tax implications at different stages. Employees should:

 Understand perquisite taxation at exercise/vesting.
 Plan their exercise & sale strategy to optimize tax liability.
 Hold shares for at least 1 year to avail LTCG benefits.
 Ensure proper compliance with income tax reporting.

 Pro Tip: Always check with a tax advisor before exercising ESOPs or selling RSUs to minimize tax impact! 

Relevant Articles from Stox n Tax

 Best Tax-Saving Investments for Salaried Employees
 How to Save Income Tax for Salaried Employees

Useful Government & External References

 Income Tax Department – ESOP & RSU Taxation Rules
 PFRDA – NPS Guidelines (for additional tax-saving insights)

 Stay tuned to Stox n Tax for more expert financial insights!

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