Perquisites – ESOPs

By | May 5, 2026
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Perquisites – ESOPs

Introduction
Employee Stock Option Plans (ESOPs) are schemes where employers offer securities to employees either free of cost or at a concessional rate. The difference between the fair market value (FMV) and the amount paid by the employee is treated as a taxable perquisite in the year of allotment. In the case of eligible start-ups, the tax liability on such perquisites may be deferred. Capital gains tax applies when these securities are subsequently sold.

About ESOPs

Employers use ESOPs to retain and motivate talent, particularly in start-ups. The process includes:

  • Grant: Offering the right to buy securities at a concessional price.
  • Vest: Establishing the employee’s right to acquire the securities.
  • Exercise: The act of purchasing the securities by the employee.
    On exercising the option and allotment, the employee may sell or hold the securities, sometimes subject to a lock-in period.

Tax Implications of ESOPs

Taxation occurs at two stages:

  • At the Time of Allotment of Shares
    • The value of perquisite is calculated as:
      (FMV on the exercise date – Price paid by the employee for each share) × Number of shares.
    • FMV is determined based on whether the shares are listed or unlisted and follows prescribed valuation norms.
    • The tax is levied in the year of allotment, even though valuation is based on the exercise date’s FMV.
  • At the Time of Sale of Securities
    • Taxable as capital gains.
    • Period of holding starts from the date of allotment.
    • Cost of acquisition is the FMV on the date of exercise.

Deferment of Tax on Perquisites in Case of Start-ups

To ease the tax burden, deferment provisions have been introduced for employees of eligible start-ups as defined under section 80-IAC. Key provisions include:

  • Time of Tax Deduction

TDS under section 192 is deferred and must be deducted within 14 days from the earliest of:

  • Expiry of 48 months from the end of the assessment year in which shares are allotted.
  • Date of cessation of employment.
  • Date of sale of the shares.
  • Taxability and Disclosure
    • Income remains chargeable in the year of allotment.
    • Employee must disclose such perquisite in the return for that year.
    • However, actual tax payment is deferred.
    • Tax on regular salary (excluding ESOPs) is computed using a proportionate formula.
  • Mechanism and Computation
    • Deferred tax becomes payable in the year of triggering event.
    • Tax already paid (excluding ESOP component) is reduced from total computed tax liability to determine final dues.
  • Consequences of Non-compliance
    • Interest and penalties may apply for failure to deduct or pay tax.
    • Prosecution provisions under section 276B may be invoked for employers.
    • Relief is available if the employee has paid the taxes and a CA certificate is provided.