ESOP and RSU Tax Guide India 2026 — Perquisite Tax, Capital Gains, ITR Filing

ESOPs (Employee Stock Option Plans) and RSUs (Restricted Stock Units) are common in IT companies and startups. They are taxed at two points — at exercise/vesting and at sale. Here is the complete guide for FY 2025-26.

ESOP vs RSU — Key Difference

Stage 1: Tax at Exercise/Vesting (Perquisite)

For Listed Company Shares

When you exercise an ESOP or when RSUs vest:

• Taxable amount: Fair Market Value (FMV) on exercise date minus exercise price
• Tax treatment: Treated as salary income (perquisite)
• TDS: Your employer deducts TDS under Section 192

Example (ESOP):

• Exercise price: ₹100 per share
• FMV on exercise date: ₹500 per share
• Shares exercised: 1,000
• Perquisite value: (₹500 - ₹100) × 1,000 = ₹4,00,000
• This ₹4,00,000 is added to your salary income and taxed at your slab rate

Example (RSU):

• FMV on vesting date: ₹500 per share
• RSUs vested: 500
• Perquisite value: ₹500 × 500 = ₹2,50,000
• This ₹2,50,000 is added to your salary income

For Unlisted Company Shares (Startups)

For ESOPs from DPIIT-registered startups, the perquisite tax is deferred until the earlier of:

• Sale of shares
• 5 years from exercise
• Cessation of employment

This deferral is a significant benefit for startup employees — you do not pay tax at exercise even if you cannot sell the shares.

Stage 2: Capital Gains Tax at Sale

When you sell the shares:

• Cost of acquisition: FMV on exercise date (the amount on which perquisite tax was paid)
• Capital gains: Sale price minus cost of acquisition

For Listed Shares

Holding period is calculated from the exercise date (not the grant date).

For Unlisted Shares

TDS on ESOP/RSU

Your employer must deduct TDS on the perquisite value at the time of exercise/vesting. This TDS is reflected in your Form 16 and Form 26AS.

Important: Many employers deduct TDS by selling some of your shares (sell-to-cover). The shares sold for TDS are also a taxable event — you must report the capital gains from these shares in your ITR.

How to File ITR with ESOP/RSU Income

File ITR-2 (or ITR-3 if you have business income).

Step 1: Get the ESOP Statement

Your employer or the stock plan administrator (Computershare, Solium, etc.) provides an annual ESOP statement showing:

• Shares exercised/vested
• FMV on exercise/vesting date
• Perquisite value
• TDS deducted

Step 2: Get the Capital Gains Statement

Your broker provides a capital gains statement for shares sold during the year.

Step 3: Fill Schedule S (Salary)

The perquisite value is included in your Form 16 under "Value of perquisites under Section 17(2)". Enter this in Schedule S.

Step 4: Fill Schedule CG (Capital Gains)

For shares sold:

• Cost of acquisition = FMV on exercise date
• Sale price = Actual sale price
• STCG or LTCG depending on holding period

Step 5: Reconcile with AIS

AIS shows all share transactions. Cross-check your capital gains statement with AIS.

Common ESOP Tax Mistakes

1. Not reporting perquisite income — It is in Form 16; the department knows
2. Using grant date as cost of acquisition — Wrong; use FMV on exercise date
3. Not reporting sell-to-cover shares — These are taxable capital gains
4. Wrong holding period — Count from exercise date, not grant date
5. Not reconciling with AIS — AIS shows all share transactions

Frequently Asked Questions

When is ESOP income taxable?

At two points: (1) at exercise — perquisite tax on the spread (FMV minus exercise price), and (2) at sale — capital gains on the appreciation after exercise.

What if I exercise ESOPs but do not sell the shares?

You still pay perquisite tax at exercise. The tax is based on FMV on the exercise date, not the sale price.

Are ESOPs from foreign companies taxed differently?

Yes. ESOPs from foreign listed companies are taxed as perquisites at exercise. Capital gains at sale are taxed based on the holding period and whether the shares are listed on a recognised stock exchange.

What is the tax treatment for startup ESOPs?

For DPIIT-registered startups, perquisite tax is deferred until sale, 5 years from exercise, or cessation of employment — whichever is earlier.

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