What is ESOP Taxation in India?

The taxation of ESOPs in India occurs at two points: 1) At the time of exercise, the difference between the Fair Market Value (FMV) and the exercise price is taxed as a perquisite (salary income). 2) At the time of sale, the difference between the sale price and the FMV (at exercise) is taxed as capital gains.

Startup Example: An employee is granted options at ₹10. She exercises them when the FMV is ₹100. The ₹90 difference is taxable as salary. She later sells the shares at ₹500. The ₹400 difference is taxable as capital gains.

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