ESOP & RSU Tax for Startup Employees (India)
The rookie mistake is exercising without liquidity—you create a salary tax bill without cash. Pros line up tax, liquidity, and paperwork before pushing the button.
How ESOP Tax Works (Listed vs Unlisted)
- Perquisite (salary tax): On exercise date, perquisite = FMV on exercise minus exercise price. Employer deducts TDS.
- FMV for unlisted shares: Determined by a SEBI‑registered merchant banker per valuation rules.
- Cost basis & clock: FMV used for perquisite becomes your cost; holding period starts from exercise.
- Listed Indian shares: If sold on a recognized exchange with STT: STCG ≤ 12 months at 15%; LTCG > 12 months at 10% over ₹1 lakh.
- Unlisted shares (common for startups): STCG (≤ 24 months) taxed at slab; LTCG (> 24 months) generally 20% with indexation for residents.
Pro tip
Without a clear liquidity window (secondary, buyback, listing), exercise can create perquisite tax without cash. Consider exercise‑and‑sell or sell‑to‑cover only when a real event exists.
How RSU Tax Works (Including Foreign Equity)
- At vest: Perquisite = FMV at vest minus any amount paid; taxed as salary with TDS.
- Cost basis & clock: FMV at vest becomes your cost; holding period starts from vest.
- Listed Indian equity sales: Follow equity CG rules with 12‑month threshold and STT.
- Foreign RSUs/ESOPs: Generally treated as unlisted for Indian tax—STCG at slab; LTCG (> 24 months) typically 20% with indexation for residents.
- Foreign tax credit (FTC): If overseas tax is withheld, claim FTC under DTAA and file Form 67 before filing ITR.
Pro tip
Keep broker statements in original currency and INR conversion records (RBI reference/SBI TT). Capital gains are computed in INR; clean FX records support FTC claims.
Startup Deferral (80‑IAC Eligible Startups)
For employees of eligible DPIIT‑recognized startups, perquisite tax on ESOPs can be deferred. TDS/payment falls due within 14 days of the earliest of: 48 months from end of the relevant assessment year, date of sale of shares, or date of employment cessation.
Reality check
Deferral isn’t a waiver. It postpones salary tax. If you quit or sell, the clock ends—plan cash to meet TDS.
Selling: Capital Gains Rules You Actually Use
- Cost basis: ESOP = FMV at exercise; RSU = FMV at vest.
- Listed Indian equity with STT: STCG 15% (≤ 12 months); LTCG 10% above ₹1 lakh (> 12 months).
- Unlisted/foreign shares: 24‑month LTCG threshold; LTCG generally 20% with indexation; STCG at slab.
- Set‑offs: STCL offsets STCG and LTCG; LTCL offsets only LTCG; carry forward up to 8 years if ITR is on time.
- Advance tax: If net tax after TDS ≥ ₹10,000, pay quarterly to avoid 234B/234C interest.
Buybacks, Secondaries, and Liquidity Windows
- Company buyback: Often taxed at the company level under Section 115QA; proceeds may be exempt for shareholders when 115QA applies. Confirm regime before assuming tax‑free in hand.
- Secondary sale: Regular capital gains rules apply; keep contract notes and payment trails.
- Lock‑ins and ROFR: Expect documentation cycles; build lead time before FY‑end if planning gains/losses.
Pro tip
If buyback FMV is near your perquisite FMV, the capital gain might be small—but salary tax from exercise still applies. Check net cash after both.
Decision Framework (Exercise vs Hold vs Sell)
- You need cash soon and there’s a real liquidity window: consider exercise‑and‑sell or sell‑to‑cover to fund perquisite tax.
- You believe in the company but no liquidity: defer exercise until a credible event is within view (secondary or buyback timelines).
- Eligible for startup deferral: map the deferral endpoints (48‑month backstop, job change, sale) and keep cash reserves.
- Foreign RSUs: accept vest‑time salary tax; plan sales around the 24‑month threshold subject to blackout windows.
Documentation That Saves You
- Grant docs: vesting schedule, exercise price, expiry.
- Valuations: merchant banker FMV for unlisted, vest/exercise FMV proof.
- TDS proofs: Form 16/12BA reflecting perquisite; payroll slips.
- Contract notes: sale transactions; buyback paperwork.
- FX records: acquisition FMV, sale proceeds, FX rates used for foreign equity.
- Form 67: file on time if claiming FTC.
Examples (Directional, FY 2024‑25)
ESOP in an Unlisted Startup
Exercise 1,000 options at ₹100 when FMV = ₹600.
- Perquisite = (₹600 − ₹100) × 1,000 = ₹5,00,000 → taxed as salary; employer withholds TDS.
- Cost basis for CG = ₹600/share. Sell later at ₹900 after 26 months → LTCG ≈ ₹300/share; generally 20% with indexation for residents.
RSU in a Foreign Parent Company
200 RSUs vest at USD 50; INR ref rate ≈ ₹83/USD. Perquisite ≈ ₹8.3L (salary; TDS).
- The ₹8.3L becomes your cost. Sell after 25 months at USD 65 → LTCG treatment typically 20% with indexation for residents.
- Claim FTC if overseas taxes were withheld; file Form 67 on time.
Common Mistakes We See
- Exercising pre‑IPO without cash planning—salary tax but no liquidity.
- Not tracking FMV used for perquisite—causes double taxation at sale.
- Missing Form 67—FTC denied despite foreign tax paid.
- Assuming buyback is always tax‑free—depends on Section 115QA conditions.
- Ignoring advance tax—ends in 234B/234C interest.
Quick Checklist (Actionable)
- Confirm vesting, expiry, and window; pull latest FMV.
- If unlisted, get merchant banker FMV for your exercise date.
- Map tax: perquisite now vs capital gains later; check deferral eligibility.
- Plan liquidity: exercise‑and‑sell or sell‑to‑cover vs hold; estimate fees.
- For foreign equity: collect vest/payroll tax statements and broker forms; plan Form 67.
- Track holding periods (12/24 months) and set‑off buckets (STCL/LTCL).
- Update advance tax if net due ≥ ₹10,000.
Disclaimer: Informational; not tax advice. Confirm specifics with your advisor.