ITR Filing FY25: Are ESOPs Taxable?

With the ITR filing season for the assessment year 2025–26 underway, many salaried employees, especially those working in startups or multinational companies, are seeking clarity on how Employee Stock Option Plans (ESOPs) are taxed. Understanding the taxation of ESOPs is crucial to avoid surprises and ensure accurate filing. Let's take a look at how ESOPs are taxed under different scenarios. 

What Are ESOPs? 

Employee Stock Option Plans (ESOPs) are benefit plans where companies offer employees the right to purchase shares at a pre-determined price after a certain period (vesting period). They're used as both a retention tool and a wealth-creation opportunity. 

When Are ESOPs Taxed? 

ESOPs are taxed at two stages: 

1. At the Time of Exercise 

When you exercise your ESOPs (i.e., buy the shares at the granted price), the difference between the Fair Market Value (FMV) on the date of exercise and the exercise price is treated as perquisite income and taxed under the head “Salaries”. 

This amount is reflected in Form 16 and must be reported in your ITR. 

2. At the Time of Sale 

When you eventually sell the shares, capital gains tax applies. The tax depends on the holding period: 

• Short-Term Capital Gains (STCG): If sold within 12 months (for listed shares), taxed at 15%.
• Long-Term Capital Gains (LTCG): If sold after 12 months, taxed at 10% (above ₹1 lakh gain, for listed shares). 

How ESOPs Are Taxed for Different Taxpayers 

Let’s consider two employees, Ravi and Meera who both exercised ESOPs in FY 2024–25 but fall under different income brackets. 

Scenario 1: Ravi (Old Tax Regime, 30% Slab) 

• Annual Salary (excluding ESOPs): ₹18,00,000
• ESOP Exercise Price: ₹100/share
• Fair Market Value (FMV) on Exercise Date: ₹300/share
• No. of Shares Exercised: 1,000
• Capital Gains: Sold shares after 1 year at ₹400/share 

Tax Calculation at Exercise of ESOP 

• Perquisite = (₹300 - ₹100) × 1,000 = ₹2,00,000
• Taxed as salary income @30% (plus cess)
• Tax = ₹60,000 + cess 

Tax Calculation at Sale (after 12 months) 

• Cost of Acquisition = FMV on exercise = ₹300/share
• Sale Price = ₹400/share
• LTCG = ₹100 × 1,000 = ₹1,00,000
• LTCG up to ₹1L is exempt → No tax 

Total Tax on ESOPs: ₹60,000 (on exercise) 

Scenario 2: Meera (New Tax Regime, 15% Slab) 

• Annual Salary (excluding ESOPs): ₹9,00,000
• ESOP Exercise Price: ₹100/share
• FMV on Exercise Date: ₹300/share
• No. of Shares Exercised: 1,000
• Capital Gains: Sold shares within 6 months at ₹320/share 

Tax Calculation at Exercise of ESOP 

• Perquisite = ₹2,00,000
• Taxed as salary income @15% under the new regime
• Tax = ₹30,000 + cess 

Tax Calculation at Sale (within 12 months) 

• STCG = (₹320 - ₹300) × 1,000 = ₹20,000
• STCG Tax @15% = ₹3,000 

Total Tax on ESOPs: ₹33,000 (₹30,000 + ₹3,000) 

Read More: ITR Filing FY24-25: Is Dearness Allowance (DA) Taxable? 

Conclusion 

Employee Stock Option Plans (ESOPs) can offer significant financial rewards, but they also come with tax implications that vary depending on when you exercise and sell your shares, and under which tax regime you fall. 

As shown in the scenarios above, the tax impact can differ substantially between individuals based on their income levels and the timing of their transactions. Therefore, understanding the two stages of ESOP taxation at exercise and at sale is critical for accurate ITR filing. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.