ESOP and RSU Taxation in India: Perquisite and Capital Gains

Stage 1: Perquisite tax at exercise or vesting

• ESOP: on the date you exercise the option, the perquisite is (FMV on exercise date − exercise price) × number of shares. It is taxed under "Salaries" at your slab rate and appears in Form 16.
• RSU: there is normally no exercise price, so the full FMV of the shares on the vesting/allotment date is the perquisite, even if you never sell a share.
• FMV rules (Rule 3(8)): for shares listed in India, FMV is the average of the opening and closing price on the exercise/allotment date; for unlisted or foreign shares, FMV is determined by a SEBI-registered merchant banker's valuation.
• The employer deducts TDS under Section 192 on the perquisite, usually by adjusting it against cash salary or selling some shares ("sell to cover").

Stage 2: Capital gains when you sell the shares

• Your cost of acquisition is the FMV already taxed as perquisite; the holding period runs from the allotment/vesting date.
• Only the gain above that FMV is taxed again — there is no double taxation of the perquisite portion.

Type of share	Short-term	Long-term
Listed on Indian exchange (STT paid on sale)	Held ≤ 12 months: 20% under Section 111A	Held > 12 months: 12.5% under Section 112A on gains above Rs 1.25 lakh a year
Foreign-listed (NASDAQ, NYSE etc.) or unlisted Indian shares	Held ≤ 24 months: taxed at your slab rate	Held > 24 months: 12.5% without indexation under Section 112 — no Rs 1.25 lakh exemption

• Foreign shares are treated as unlisted for Indian tax even if listed on a recognised overseas exchange, because no STT is paid — so Section 112A benefits do not apply.
• If foreign tax was withheld on dividends or gains, relief can be claimed under the DTAA by filing Form 67 before filing the ITR.

Foreign RSUs: Schedule FA disclosure is mandatory

• Shares of a foreign employer and the overseas brokerage account (E*TRADE, Fidelity, Schwab etc.) must be disclosed in Schedule FA of ITR-2 or ITR-3 — even when nothing was sold during the year.
• Foreign income (dividends, sale gains) also goes in Schedule FSI where DTAA relief is claimed.
• Holding even one foreign share means ITR-1 and ITR-4 cannot be used.
• Non-disclosure can attract a penalty of up to Rs 10 lakh per year under the Black Money Act, so reconcile broker statements carefully.

Startup employees: TDS deferral under Section 80-IAC route

• Employees of eligible startups under Section 80-IAC need not pay perquisite tax in the year of exercise. Under Section 192(1C), TDS (and the tax) is deferred to the earliest of: 48 months from the end of the assessment year of allotment, sale of the shares, or leaving the employer.
• The tax is computed at the rates of the year of exercise; only payment is postponed. The capital gains stage is unaffected.
• This applies only to the small set of startups certified by the Inter-Ministerial Board — most private company ESOPs do not qualify.

Which ITR form should be used?

• ITR-2 for salaried employees with ESOP/RSU perquisites and capital gains (and Schedule FA where shares are foreign).
• ITR-3 if you also have business or professional income, such as F&O trading.
• ITR-1 cannot be used if you hold foreign assets or have taxable capital gains beyond the limited Section 112A reporting now allowed in ITR-1.

Documents to keep ready

• Grant letter, vesting schedule and exercise/allotment statements from the employer or plan administrator.
• Form 16 and salary slips showing the perquisite value and TDS under Section 192.
• Broker statements for sales (Indian or foreign), with dates, quantities and prices in INR.
• Year-end foreign brokerage holding statement for Schedule FA, and Form 67 details where foreign tax credit is claimed.
• AIS and Form 26AS — cross-check with our AIS and Form 26AS mismatch guide, and compare regimes with our old vs new tax regime guide.

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Frequently asked questions

How are ESOPs taxed in India?

ESOPs are taxed twice. First, at exercise: the difference between the fair market value on the exercise date and the price you paid is taxed as a salary perquisite at slab rates, with the employer deducting TDS. Second, at sale: the difference between the sale price and that FMV is taxed as capital gains.

How are RSUs of a foreign company taxed in India?

The FMV of shares on vesting is taxed as salary perquisite at slab rates. On sale, foreign-listed shares are treated like unlisted shares for Indian tax: gains are short-term at slab rates if held up to 24 months and long-term at 12.5% without indexation if held longer. The shares must also be disclosed in Schedule FA of ITR-2 or ITR-3.

Do RSUs get the Rs 1.25 lakh LTCG exemption?

Only if the shares are listed on an Indian recognised stock exchange and STT is paid on sale, so that Section 112A applies. Foreign-listed RSUs (NASDAQ, NYSE etc.) do not get the Rs 1.25 lakh exemption; their long-term gains are taxed at 12.5% under Section 112.

What is the ESOP tax deferral for startup employees?

Employees of eligible startups registered under Section 80-IAC can defer TDS on the exercise perquisite to the earliest of: 48 months from the end of the assessment year in which shares were allotted, the date of sale of the shares, or the date they leave the company.

Sources reviewed

• Income Tax Department – Taxation of Employee Stock Option Plan (ESOP)
• Income Tax Department – Tax transparency on foreign assets and income

This guide is for general understanding. Cross-border ESOP and RSU cases involve FMV valuation, DTAA and residency questions that vary by employer plan, so verify your specific facts with a tax expert before filing.