How are stock options taxed?

Stock options are taxed based on when they are exercised and sold. In India, employee stock options (ESOPs) are taxed at two stages: (1) when exercised, as a perquisite under salary income, and (2) when sold, as capital gains tax. Short-term gains (sold within 12 months) are taxed at 15%, while long-term gains (sold after 12 months) above ₹1 lakh are taxed at 10%.

1. How Are Stock Options Taxed in India?

Stock options, especially Employee Stock Option Plans (ESOPs), are taxed in two stages:

• At Exercise: When an employee exercises ESOPs, the difference between the fair market value (FMV) and the exercise price is taxed as a perquisite under salary income.
• At Sale: When the employee sells the shares, capital gains tax is applicable:
  • Short-Term Capital Gains (STCG): If sold within 12 months, taxed at 15%.
  • Long-Term Capital Gains (LTCG): If sold after 12 months, gains above ₹1 lakh are taxed at 10%.

2. Taxation on Non-Employee Stock Options

Investors trading in stock options (derivatives) are also taxed differently:

• Intraday Option Trading: Profits from options trading are treated as speculative income and taxed as per the income tax slab.
• Short-Term Gains (Less than 12 Months): Taxed as per income tax slab if considered business income.
• Long-Term Gains (More than 12 Months): Options rarely qualify for long-term capital gains, as they have expiry dates.
• Securities Transaction Tax (STT): STT is applicable on options trading, increasing tax liability.

3. How to Reduce Tax on Stock Options?

Investors and employees can minimize tax on stock options using these strategies:

• Plan ESOP Exercise Timing: Exercising stock options in a lower income tax year can reduce the perquisite tax.
• Hold Shares for More Than a Year: Holding ESOP shares for over 12 months helps qualify for LTCG tax benefits.
• Claim Business Expenses: Traders can deduct expenses like brokerage and internet costs to reduce taxable income.
• Use Tax-Loss Harvesting: Offsetting losses from other trades can lower overall tax liability.
• Invest in Tax-Efficient Instruments: Balancing stock options with tax-saving investments like ELSS funds can optimize tax liability.

4. Conclusion

Stock options in India are taxed at two levels: (1) as salary income when exercised and (2) as capital gains when sold. For traders, stock option profits are taxed as business income. Understanding these tax rules can help investors and employees optimize their tax liabilities and maximize returns.