Exercise
Also known as: Option Exercise, Share Purchase
The act of purchasing ESOP shares by paying the exercise price, triggering perquisite tax liability.
Detailed Explanation
Exercise is when an employee buys ESOP shares by paying the predetermined exercise price. This creates a taxable perquisite equal to (FMV on exercise date minus exercise price). Exercise timing is crucial - doing it without liquidity creates tax liability without cash. Many employees use exercise-and-sell or sell-to-cover strategies during liquidity windows.
Related Calculators
Related Terms
ESOP
Employee Stock Option Plan - A benefit plan giving employees the right to buy company shares at a predetermined exercise price.
FMV
Fair Market Value - The price at which shares would trade between willing buyers and sellers in an open market.
Perquisite Tax
Tax on employment benefits valued in money, including ESOP exercise gains and RSU vesting, taxed as salary income.
Vesting
The process by which employees earn rights to ESOPs or RSUs over time, typically following a predefined schedule.