How ESOPs are taxed in India under the new Income-tax Act

On 1 April 2026, the Income-tax Act, 2025 replaced the Act of 1961. For ESOP holders, the headline is reassuring: the structure of ESOP taxation is unchanged. The section numbers moved, and "assessment year" gave way to a single "tax year", but the logic you may already know still applies.

Two tax moments, not one

ESOPs in India are taxed at two points.

1. When you exercise (as salary). The difference between the share's fair market value (FMV) on the exercise date and the exercise price you pay is treated as a perquisite, part of your salary. Your employer deducts tax (TDS) on it at your slab rate.

2. When you sell (as capital gains). The difference between the sale price and the FMV on the exercise date is a capital gain. Your cost is the FMV used at exercise, so the same gain is not taxed twice.

Grant and vesting are not taxable events in themselves.

A worked example

Priya holds 1,000 vested options with an exercise price of ₹10.

Notice the problem in row three. Priya owes roughly ₹1.5 lakh in tax on shares she cannot sell yet. That gap between tax and cash is the central difficulty of ESOPs in India.

How capital gains are taxed

The rate depends on whether the shares are listed and how long you held them after exercise.

The holding period starts on the date shares are allotted to you, not the grant date.

How FMV is set

• Listed company: based on the exchange price on the exercise date.
• Unlisted company: set by a SEBI-registered merchant banker, on a date not more than 180 days before exercise.

The startup deferral

Employees of eligible startups can postpone the tax at exercise. To qualify, the company must be DPIIT-recognised and hold an inter-ministerial board certificate under the startup tax-holiday provision. The tax becomes payable at the earliest of:

• roughly five years after the year of exercise,
• the day you sell the shares, or
• the day you leave the company.

Two caveats. First, it is a deferral, not an exemption: the amount is fixed at exercise and still has to be paid. Second, it reaches very few people: as of October 2026, just 4,467 startups held the certificate, out of more than 2.5 lakh recognised startups. Industry groups asked Budget 2026 to widen the deferral and remove the "leaving" trigger; it did not.

If your employer is abroad

If you hold options in a foreign parent company, the same Indian two-stage logic applies, but you also have to report the foreign shares in your return's foreign-asset schedule, and the foreign country may tax you too. Treaty relief is usually available, but this is an area where professional advice is worth paying for.

Practical takeaways

1. Before exercising, estimate the tax at exercise and make sure you can pay it.
2. Keep the FMV used at exercise; it is your cost for capital gains.
3. Check whether your employer qualifies for the deferral rather than assuming it does.
4. Documents that cite sections of the 1961 Act still describe the same rules; only the references have moved.

This article is general information, not tax advice. Rates are as of November 2026 and exclude surcharge and cess.

Sources: KS&K — ESOP taxation under the Income-tax Act, 2025, Treelife — the Income Tax Act 2025 is live, StartupFeed — DPIIT and 80-IAC counts, October 2026, Treelife — Union Budget 2026 synopsis