In India, stock options are taxed at the time of exercise and when they are sold. When you exercise stock options (ESOPs), you may have to pay tax on the difference between the exercise price and the market value at the time of exercise. Later, when you sell the shares, any profit you make will be subject to capital gains tax. Short-term capital gains tax applies if the shares are sold within 24 months of purchase, and long-term capital gains tax applies if they are sold after 24 months.

What Are Stock Options?

Stock options, particularly Employee Stock Option Plans (ESOPs), are a way for companies to reward their employees. Employees are given the option to buy company shares at a set price in the future. These options allow employees to benefit from any future increase in the company’s share price, turning them into a valuable asset if the stock price rises.

Tax Treatment of Stock Options in India

The taxation of stock options in India occurs at two stages: at the time of exercise and at the time of sale. When you exercise stock options, the difference between the exercise price (the price at which you buy the stock) and the market price of the stock is considered a perquisite and taxed as income under the head “Salary” according to Section 17 of the Income Tax Act. This is considered your taxable income for the year.

How Is the Tax Calculated on Exercise of Stock Options?

When you exercise stock options, you pay tax on the difference between the exercise price and the market price on the date of exercise. This difference is taxed as a perquisite under salary income. For example, if the exercise price is ₹100 per share and the market price is ₹150, the ₹50 difference is taxed as income. This is added to your overall salary income for the year and taxed accordingly, depending on your income tax slab.

What Happens When You Sell the Stock After Exercising the Options?

After exercising the stock options, if you sell the stock, any profit you make from the sale is subject to capital gains tax. If you sell the stock within 24 months from the date of exercise, the profit is considered short-term capital gains (STCG) and taxed at 15%. If you sell the stock after 24 months, the profit is considered long-term capital gains (LTCG), and it is taxed at 10% if the gain exceeds ₹1 lakh in a financial year.

How Is the Cost of Acquisition Calculated for Stock Options?

The cost of acquisition for stock options is generally the exercise price that you paid for the shares. However, if there was any perquisite tax paid at the time of exercise, this amount can be added to the cost of acquisition to calculate the capital gains tax when you sell the shares later. This ensures that the tax treatment remains accurate and reflects the true cost of the investment.