How are ESOPs taxed in India?

Good you are excited that a startup you are working for or planning to join is giving you a good ESOP kitty of 50 lakhs and it will quadrupled to something like 2 crore. There is a small catch here.

Before you start to imagine buying that BMW or a new house, please ensure you factor in the taxes one has to pay in India when they exercise their ESOPs or sell those shares.

To understand the ESOP taxation, let us first understand the flow that happens.

An employee gets an ESOP or Employee Stock Option, which is first converted into a share of the company when they exercise the option at the exercise price mentioned in the ESOP grant letter.

This is Part A of taxation- Buying the Shares

Let us take this example where an employee has been given 50 lakh worth of option, where strike/exercise price is Rs 100, Allocation Price is Rs 500, Fair Market Value of share in 2020 was Rs 700 and Fair Market Value in 2024 is Rs 2000.

This means that employee has 50 lakh/ 500 = 10,000 options which will vest in 25% every year and by 1st Jan 2024, he/she will own entire 10,000 options.

This is an example but very close to market reality and as per current rules one needs to exercise the options on exit so we are working on that case here and not the case where employee continues to work.

Here is how it will look like:

Date	Activity	Cost to Pay	Tax to Pay
1st Jan 2020	ESOPs worth 50 L allocated	nil	nil
1st Jan 2024	100% stock vested	nil	nil
1st April 2024	Employee Resigns and exercises option	=10000*100 or 10 Lakh	=(10000*(2000-100) * 30%)* 4% cess or 59.28 lakh

Above is a slightly simplified model and may change with tax slabs as well as cess % but overall this is the amount one has has to pay- 69.28 lakhs to buy those shares worth 50 L that one was granted at the time of joining.

I know, most of us would frown looking at this calculation thinking that for 50 L ESOPs, why would someone pay 70 lakh? That doesn't make any sense.

Well, we understand the frustration but point here is now those 50 lakh worth of shares are actually worth 2 crore and if you get to sell them completely today itself then one will get 10000*2000= 2 crore - 70 lakh in tax, that means netting a good 1.3 crore.

If you look this way this sounds like a fair deal right? You worked for 4 years and now after 4 years you have net net 1.3 crore in hand made from ESOPs. Almost like 32 lakh in cash annual pay-wise.

That's the reason, weather we hate it or hate it (I didn't mean to write love it), government considers this incremental value you got on every share, difference between Rs 2000 and Rs 100, i.e Rs 1900 as a benefit you have got from the company and is considered as part of taxable income.

So yes, if you are going to resign, you will have to shell out Rs 69.28 lakh from your savings to acquire those 10,000 shares in your name and hope that one day you get to sell these shares at a much higher value, which will bring us to the second part of taxation.

This is Part B of taxation- Selling the Shares

So let's you paid and acquired those 10,000 shares of your startup and after 1 year in 2025 that company got acquired and every share of that company was sold at Rs 3000 per share.

In this case, you will get Rs 3000 *10000 = 3 crore- taxes you have to pay for selling the shares.

Here tax would be 30% plus 4% cess basis tax slab on the difference in price you are buying and selling which would be (3000-2000)=1000, so tax would be (10000*(3000-2000)*30%)*4% or approx 31.2 lakhs.

Taking that into consideration you would net net get 2.69 crore now and factoring in earlier 69 lakh you paid earlier. You made 2 crore in ESOPs.

We hope everyone does. Me too!

I know, what you are thinking.

What if you never get to sell those shares. An unlikely event where startup shuts down or sells for a very low price, what happens to the 70 lakh you paid at exit? That's a loss.

We hope it never happens.

ESOPs and taxation

There is a lot more in taxation like listed vs unlisted company. Finer way of calculation and internal buying cases. We wish to cover but maybe next time.

In this one we just wanted to highlight Part A & B of taxation when it comes to ESOPs. Please speak to a good CA when it comes to dealing with your ESOPs as there might be few mistakes here and there in this blog and should't be considered as valid legal doc.

Hope we all mint money like the example we gave above.