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Here's how ESOPs are taxed at time of allotment of shares and at the time of selling the shares. (Photo: PTI)

What are employee stock options? How are ESOPs taxed?

2 min read . Updated: 19 Aug 2020, 06:23 AM IST Avneet Kaur

ESOPs are taxed twice -- first at the time of exercising the option and second at the time of selling the allotted shares.

Many companies offered employees stock options or ESOPs to their employees in lieu of pay cuts due to covid19 pandemic. An Esop is the option which a company provides to the employees to purchase the company's shares on a future date at a lower price. Employees can exercise ESOPs after a lock-in period. ESOPs are quite popular with startups. Employee stock option are taxed twice. Read on to know details.

ESOPs are taxed twice -- first at the time of exercising the option and second at the time of selling the allotted shares.

How are ESOPs taxed at time of allotment of shares

Difference between the fair market value of the shares as on the date of exercising the option and the amount paid to exercise the option is taxable as per the tax bracket of the employee. The taxable value is called 'perquisite.'

How are ESOPs taxed at the time of selling the shares

Difference between the sale value and fair market value as on the exercise date is taxable as capital gains.

Listed shares

If ESOPs are held for a period of less than 12 month, the gains made on the listed shares will be treated a short term capital gains and will be taxed at 15%.

If ESOPs are sold after completion of a period of 12 months, the gains on the listed shares will be treated as long term capital gains. The gains above ₹1 lakh will be taxed at 10%. Gains upto ₹1 lakh are not taxable.

Unlisted shares

In case of unlisted shares, gains made on shares held for a period of over 24 months are treated as long term capital gains and is taxed at 20% with indexation.

If holding period of unlisted shares is lesser than 24 months, the gains will be treated as short term capital gains and will be taxed as per applicable slab rate of the employee.

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