ESOP and RSU Tax in India: What You Pay at Exercise and Again at Sale
Your Form 16 shows a large ESOP or RSU figure you never received in cash. A year later you sell the shares, and the capital gains working from your broker looks nothing like what the tax law expects.
Most problems with employee equity come from treating two separate tax events as one, or from missing the foreign-asset filing that sits beside them.
Quick answer: An ESOP or RSU is taxed twice, on different amounts. At exercise or allotment, fair market value (FMV) minus what you paid is salary. At sale, only the gain above that same FMV is capital gains. Residents holding shares of a foreign parent must also report them in Schedule FA every year.
Contents
The Income-tax Act, 2025 applies from 1 April 2026. Allotments before that date follow the 1961 Act. This post gives the 1961 provision first and the 2025 Act provision after it.
When are ESOPs and RSUs taxed in India?
Indian tax ignores the grant and, for options, the vesting date. The charge arises when shares are actually allotted or transferred to you.
Grant: no tax. Keep the grant letter and the scheme document.
Vesting: no tax for options. For RSUs, shares are usually delivered at vesting, so that is when the perquisite arises.
Exercise and allotment: perquisite under section 17(2)(vi) of the 1961 Act, now section 17(1)(d) of the 2025 Act. It is salary, taxed at your slab rate, and the employer deducts TDS under section 192 (now section 392).
Sale: capital gains. The cost is the FMV already used for the perquisite, under section 49(2AA) (now section 73(1), Table Sl. No. 4).
How is the perquisite valued at exercise?
The perquisite is FMV on the date of exercise, reduced by the amount you actually paid or that was recovered from you. The method sits in Rule 3(8) and 3(9) of the 1962 Rules, now Rule 15(6) and 15(7) of the Income-tax Rules, 2026.
Listed on an Indian exchange: average of the opening and closing price on the exercise date. Where it is listed on more than one exchange, use the exchange with the highest trading volume.
No trading that day: closing price on the closest preceding date.
Not listed on a recognised stock exchange: value determined by a SEBI-registered Category I merchant banker on the specified date.
Specified date: the exercise date, or any earlier date not more than 180 days before exercise.
A chartered accountant's Rule 11UA report, a fundraising price or a board-approved value does not replace the merchant banker value for this purpose. Our ESOP share valuation guide explains how these values differ.
Worked example: unlisted ESOP from exercise to sale
An employee of an unlisted Indian company exercises 2,000 options at ₹100 each in August 2026. The merchant banker's FMV, dated 60 days before exercise, is ₹600 per share.
Perquisite: 2,000 × (₹600 − ₹100) = ₹10,00,000, added to salary.
Tax at a 30% marginal rate plus 4% cess, ignoring surcharge: about ₹3,12,000, deducted by the employer.
The shares are sold 30 months later at ₹1,500. Unlisted shares are long-term after 24 months (section 2(42A), now section 2(101)).
Capital gain: 2,000 × (₹1,500 − ₹600) = ₹18,00,000. Tax at 12.5% under section 112 (now section 197): ₹2,25,000, plus cess.
If the ₹100 exercise price were wrongly used as cost, the gain would be ₹28,00,000. The extra ₹10,00,000 would be taxed a second time, although it was already taxed as salary.
Practice guide for professionals
For ESOP, valuation and cross-border work, the ₹699 bundle collects all four practice guides (Amended Form 3CD; GSTR-9 & 9C; Audit Documentation & CARO 2020; GST Notices, Demands & Appeals).
How does the start-up TDS deferral work?
Employees of an eligible start-up do not pay tax on the perquisite in the year of allotment. An eligible start-up is one that qualifies under section 80-IAC of the 1961 Act, now section 140 of the 2025 Act.
Under section 192(1C) of the 1961 Act, the employer deducts tax within 14 days of the earliest of:
48 months from the end of the relevant assessment year,
the date the employee sells the shares, or
the date the employee leaves that employer.
Section 392(3) of the 2025 Act keeps the rule but links its timing to section 289(3), which says 60 months from the end of the relevant tax year. Because the tax year now replaces the old previous year and assessment year, the outer date ends up in about the same place. Tax is computed at the rates in force for the year of allotment.
Example: shares are allotted on 10 August 2026, in tax year 2026-27. If nothing else happens, tax falls due within 14 days after 31 March 2032. If the employee resigns on 15 January 2028, it is due by 29 January 2028.
Under section 289(3), the deferral applies only where the shares were allotted or transferred by the current employer. The employee's own demand (section 156(2) of the 1961 Act, now section 289(3)) follows the same trigger dates.
What changes for RSUs of a foreign parent?
Many employees in India receive RSUs or options in a US or other foreign-listed parent. The perquisite still arises when the shares are delivered, and Form 16 will show it.
FMV basis: "recognised stock exchange" in Rule 15 refers to Indian exchanges under the Securities Contracts (Regulation) Act, 1956. A share listed only abroad therefore falls under the merchant banker clause on a plain reading. In practice, many employers base the value on the overseas market price. Check what your Form 16 used, because that figure becomes your cost.
Holding period: foreign-listed shares are not listed in India, so they are long-term only after 24 months.
Rates: long-term gains are taxed at 12.5% under section 112 (now section 197), and the ₹1.25 lakh exemption under section 112A (now section 198) does not apply. Short-term gains are taxed at slab rates.
Non-resident at exercise: in Rajesh R. Hemrajani v. ITO (ITA No. 1284/Mum/2025), the Mumbai Tribunal allowed exercise-date FMV as cost even though the perquisite was not taxed in India. This was a Tribunal ruling, and a Hyderabad bench has taken a different view on other facts.
Example: 100 RSUs vest on 15 May 2026 at US$150, taken at an illustrative ₹85 per dollar. The perquisite is ₹12,75,000. The shares are sold on 10 February 2027 at US$180, taken at ₹87, giving ₹15,66,000.
The short-term gain of ₹2,91,000 is taxed at slab rates. Held past 15 May 2028, the same gain would be long-term at 12.5%. Use the conversion rates the rules prescribe for each figure, not these illustrative ones.
Schedule FA and foreign tax credit: what residents must file
A resident and ordinarily resident individual must report foreign assets in Schedule FA of the return. For foreign shares, the reporting period is the calendar year, not the Indian tax year.
RSUs held at any time from 1 January to 31 December 2026 go into the return for tax year 2026-27, even if the shares were not sold.
Shares sold in February 2027 appear again for calendar year 2027, together with the sale proceeds.
Report both the foreign shares and the brokerage or custodial account that holds them.
Holding foreign shares rules out ITR-1 and ITR-4.
Penalty risk: sections 42 and 43 of the Black Money Act, 2015 provide a ₹10 lakh penalty. From 1 October 2024, it does not apply where the movable foreign assets total ₹20 lakh or less.
Foreign tax credit: tax withheld abroad, for example on dividends, is claimed in Form 44 under Rule 76 of the 2026 Rules (earlier Form 67 under Rule 128). File it within 12 months from the end of the tax year, for a return filed within the section 263(1) or 263(4) time limit.
Employees moving to or from India should first check their residential status. See Schedule FA for returning NRIs and the wider foreign asset reporting guide.
Old and new section numbers at a glance
ESOP perquisite: s.17(2)(vi) → s.17(1)(d)
FMV method: Rule 3(8), 3(9) (1962 Rules) → Rule 15(6), 15(7) (2026 Rules)
Salary TDS: s.192 → s.392; start-up deferral s.192(1C) → s.392(3), read with s.289(3)
Eligible start-up: s.80-IAC → s.140
Cost on sale: s.49(2AA) → s.73(1) Table Sl. No. 4
Short-term capital asset: s.2(42A) → s.2(101)
Tax rates: s.111A → s.196; s.112 → s.197; s.112A → s.198
Foreign tax credit: Rule 128, Form 67 → Rule 76, Form 44
For the full TDS mapping, see TDS sections 192 to 194T vs 392 and 393.
Common mistakes to avoid
Using the exercise price, or the broker's cost basis, as cost instead of the perquisite FMV.
Counting the holding period from the grant date instead of the date of allotment.
Treating foreign-listed shares as listed and applying a 12-month rule or the ₹1.25 lakh exemption.
Leaving Schedule FA blank because nothing was sold during the year.
Relying on a merchant banker report dated after the exercise date, or more than 180 days before it.
Assuming start-up deferral continues after you leave the employer.
Companies setting up or revising a plan can map their valuation and documentation with the free Deal-Shield toolkit.
Related reading
Sources
Income-tax Act, 1961: sections 17(2)(vi), 49(2AA), 192(1C), 156(2), 80-IAC, 112, 112A.
Income-tax Act, 2025 (as amended by the Finance Act, 2026): sections 2(101), 17(1)(d), 73(1), 140, 196 to 198, 289(3), 392(3).
Income-tax Rules, 2026, Rule 15, notified 20 March 2026.
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, sections 42 and 43, as amended by the Finance (No. 2) Act, 2024.
Rajesh R. Hemrajani v. ITO, ITA No. 1284/Mum/2025 (ITAT Mumbai).
This article is for education only and reflects the law as of 30 October 2026. It is not tax advice for any individual case.
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