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Startup ecosystem · ESOP

How ESOPs are taxed: the two-event model every employee must understand

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  1. Facts

    ESOPs are taxed at two separate events, a fact most employees (and many employers) don't know until the tax notice arrives:

  2. Provisions and law

    • IT Act 1961, Sec 17(2)(vi) (now 17(1)(d)) | Sec 192 (now 392) | Sec 45 | Finance Act 2020 Sec 192(1C)

  3. Analysis

    Event 1, Exercise: When employee exercises options and receives shares, the difference between FMV on exercise date and exercise price is taxed as perquisite income (salary), at the employee's marginal rate (up to 30%). Event 2, Sale: When employee sells the shares, the difference between sale price and FMV on exercise date is taxed as capital gains, LTCG at 12.5% (if held 24+ months for unlisted), STCG at slab rate.

  4. Conclusion

    Talk to a Savvy for the exact next step on your case.

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Foreign shares, RSU and ESOP sale with Schedule FA

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