What are ESOPs? What is the Tax regime according to 2025 budget?
ESOP full form is Employee Stock Ownership Plan. Employers under this plan give their
employees company stock at a minimal or zero extra cost which they can cash after a time
period at a fixed price.
ESOP Taxation
ESOPs have two tax implications:
• When an employee exercises their rights and buys company stock
• When the employee sells the shares after acquiring them
Let us examine these examples more closely:
Tax treatment on purchasing the shares
Share are available for buyback by employees after the vesting date at a price below the
share's Fair Market Value (FMV) on such date. Accordingly, the gap between the FMV and
exercise price of the share is viewed as a pre-condition in the hands of the employee and is
taxed at his income tax slab rate.
For new companies, though, the government has made the tax implication of ESOPs less
severe.
The employees of the start-up would not be required to pay the tax on the benefit in the year
when they exercised the ESOP. TDS on ESOPs would be postponed until the earlier of the
below-specified dates:
•\tFive years from the date of grant of ESOP
•\tWhen does the employee sell the ESOP?
•\tDate of exit from the firm
Tax treatment at the time of sale of shares
If the employee sells the shares, the difference between the selling price and the FMV on the
date the share was exercised is taxable as capital gains.
If you sell your shares within a year of buying them, you will have to pay a 10% tax on any
profits over Rs.1 lakh. If the shares are sold within 12 months, the profits are taxed at 15%.
Taxation of foreign ESOPs in India is also the same, and you would be taxed in India for the
perquisites received from a foreign company.
Should India Tax Residents on ESOPs Earned Abroad?
The taxability of the income on ESOPs would vary based on the residential status of a taxpayer
on the day of exercising options. The income of an employee will be taxed if he is a resident
Indian. If the non-resident but not ordinarily resident have sold shares or exercised options
outside India, then he is exempted from paying tax in India.
But there are few disclosures in the foreign asset income tax return forms. A employee can be
required to report foreign holdings under FA of his income tax return, if he possesses ESOPs of
a foreign firm.
employees who spend half of the vesting period on employment related work outside India (and
half in India) need not be taxed in India on the corresponding India proportion of perquisite if
they are non-residents for India tax purposes when options are exercised.
This will preclude double taxation issues for these employees and preclude administratively
burdensome withholding tax requirements from the Indian employer entities,"
What Should Be ESOPs' Fair Tax System?
India needs to keep in mind three major principles for an optimal taxation system on ESOPs --simplicity, equity, and growth facilitation. taxation must be simple and should only take place
when employees accrue a financial gain. Moreover, tax regime must apply uniformly irrespective
of nature of instrument or qualifications of employer.
government to act on matters regarding the method of calculation of capital gains in case of
"returning Indians" who are already taxed upon the exercise of options in the foreign nation.