Right timing of ESOP sale can unlock higher post-tax gains

EQUITY COMPENSATION HAS become a key component of employee remuneration in the startup and tech ecosystem. A disciplined year-end review can help employees avoid surprises, optimise taxes, and plan liquidity.

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Employee Stock Option Plans (ESOPs) are taxed at two different points: On exercise of vested options as a perquisite and on sale of shares as capital gains.

On exercise of vested options

When an employee exercises vested options and receives shares from the employer, the difference between the Fair Market Value (FMV) of the share on the date of exercise and the exercise price is taxed as a perquisite under the head 'Salary'.

The tax on such perquisite is withheld by the employer via payroll as withholding taxes (TDS). Even if TDS is deducted correctly on the perquisite, sometimes the overall tax payable based on total income may be higher, especially where surcharge thresholds are crossed.

On sale of shares